10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)
ý	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2009
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.
(Debtor-in-Possession as of October 27, 2009)
(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)	02-0426634 (I.R.S. Employer Identification No.)
6 Executive Circle, Suite 250 Irvine, California (Address of principal executive offices)	92614 (Zip Code)

Registrant's telephone number, including area code: (949) 250-7700

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class	Name of Each Exchange on Which Registered
Common Stock, par value $.05 per share	NASDAQ Global Market

Securities registered pursuant to Section 12(g) of the Act:
None

         Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES o    NO ý

         Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES o    NO ý

         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 ý    NO o

         Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. YES ý    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. (Check one):

Large accelerated filer o Accelerated filer o Non-accelerated filer o
(Do not check if a smaller reporting company) Smaller reporting company ý

         Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES o    NO ý

         The aggregate market value of the voting stock held by non-affiliates of the registrant (shares of common stock held by each executive officer and director and by each person who, as of such date, may be deemed to have beneficially owned more than 5% of the outstanding voting stock have been excluded in that such persons may be deemed to be affiliates of the registrant under certain circumstances) was $6,763,489 as of June 30, 2009 (the last business day of the registrant's most recently completed second fiscal quarter) based upon 4,901,079 shares of common stock held by such non-affiliates and the $1.38 closing price of the registrant's common stock on the NASDAQ Stock Market LLC reported for June 30, 2009.

         The number of shares of Common Stock outstanding as of March 30, 2010 was 10,995,902.

CALIFORNIA COASTAL COMMUNITIES, INC.

(DEBTOR-IN-POSSESSION)

FORM 10-K

FOR THE YEAR ENDED DECEMBER 31, 2009

INDEX

		Page No.
PART I
Item 1.	Business		3
Item 1A.	Risk Factors		15
Item 1B.	Unresolved Staff Comments		35
Item 2.	Properties		35
Item 3.	Legal Proceedings		35
Item 4.	(Removed and Reserved)		36
PART II
Item 5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		37
Item 6.	Selected Financial Data		38
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations		39
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		39
Item 8.	Financial Statements and Supplementary Data		39
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure		39
Item 9A.	Controls and Procedures		39
Item 9B.	Other Information		40
PART III
Item 10.	Directors, Executive Officers and Corporate Governance		41
Item 11.	Executive Compensation		43
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		50
Item 13.	Certain Relationships and Related Transactions, and Director Independence		51
Item 14.	Principal Accounting Fees and Services		52
PART IV
Item 15.	Exhibits, Financial Statement Schedules		53

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PART I

Item 1.    Business

Status of Chapter 11 Cases

        On October 27, 2009, California Coastal Communities, Inc. ("we") and certain of our direct and indirect wholly-owned subsidiaries (collectively with us, the "Debtors") filed voluntary petitions (the "Chapter 11 Petitions") for relief under chapter 11 of title 11 ("Chapter 11") of the United States Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the Central District of California (the "Bankruptcy Court"). The Chapter 11 Petitions are being jointly administered under the caption In re California Coastal Communities, Inc., Case No. 09-21712-TA (the "Chapter 11 Cases"). The sole purpose of the Chapter 11 Cases is to restructure the debt obligations under our senior secured revolving credit agreement ("Revolving Loan") and our senior secured term loan ("Term Loan") for which KeyBank National Association ("KeyBank") serves as the agent to the lending syndicates. On February 26, 2010, KeyBank notified us and the lenders that they are resigning as agent. As of December 31, 2009, $81.7 million in principal amount was outstanding on the Revolving Loan and $99.8 million in principal amount was outstanding on the Term Loan. A major stockholder of the Company currently holds approximately 16% of the Revolving Loan and 19% of the Term Loan.

        We and the other Debtors continue to operate our businesses and manage our properties as "debtors-in-possession" under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. We have obtained the Bankruptcy Court's 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.

        On March 26, 2010, we filed a proposed disclosure statement and proposed joint plan of reorganization with the Bankruptcy Court, neither of which has been approved by the Bankruptcy Court. The proposed joint plan provides for the extension of the Revolving Loan and the Term Loan to enable us to complete construction and sale of the homes at our Brightwater project. Throughout the Chapter 11 reorganization process we have continued and will continue to try to work with the various members of our lending syndicate to determine whether a consensual restructuring of the Revolving Loan and the Term Loan can be accomplished. However, there can be no assurance that we and the other Debtors will be able to successfully confirm, consummate and execute a plan of reorganization with respect to the Chapter 11 Cases that is acceptable to the Bankruptcy Court and the creditors and other parties in interest. If the disclosure statement is approved, we will have the exclusive right to solicit acceptance of our plan through June 22, 2010.

        While we intend to maintain business operations through the reorganization process, our liquidity and capital resources are significantly affected by the Chapter 11 Cases, which has 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. In addition, 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. As a result of the filing of our joint plan, our authorization to continue to use cash collateral with the consent of our lending syndicate will terminate on April 2, 2010. Therefore, on March 26, 2010, we

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filed a motion for authority to continue to use cash collateral over the objections of our lending syndicate. A hearing on that motion is scheduled for March 31, 2010

        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. During the period from October 27, 2009 to December 31, 2009, we incurred costs totaling $1.3 million associated with the reorganization. We will continue to incur significant costs associated with the reorganization which are expected to adversely affect the results of our business 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 and continued weakness in the California economy. During 2009, we generated 33 net sales orders at Brightwater, increased construction starts during the second and third quarters to keep pace with sales orders, and started construction of a limited number of speculative homes which are in greater demand in today's market than contract homes that are constructed over a five to seven month period. While sales of the Trails and Sands products, which are generally under $1.0 million, increased during 2009, sales of our larger Cliffs and Breakers homes have been challenged by limitations on jumbo-mortgage financing and the downturn in the housing market, which have reduced demand for homes exceeding $1.0 million. However, the jumbo mortgage market appears to be gradually improving with the spread between conforming loans now under 1% after being as high as 1.7% and lenders requiring down payments of 20% on jumbo mortgages compared with 30% or more during the peak of the credit crisis.

        Due to cash requirements for ongoing home construction and debt amortization, our ability to meet future loan repayment requirements will depend on the results of the Chapter 11 Cases, as well as continued home sales at our Brightwater project. Our goal is to restructure debt payments based on our current expectations of continued sales success with our Trails products, with gradually improving sales of the larger products. The inventories of resale homes in the Huntington Beach coastal zip codes have been declining, which reduces the supply of resale homes with which Brightwater may compete.

        Continuing negative conditions in the housing and credit markets give rise to uncertainty as to our present and future ability to meet our projected home sale closings and whether modified financings can be obtained in order for us to meet our debt obligations. There can be no assurance that we will be successful in any of these endeavors. While the national credit markets appear to be improving, there is limited availability of financing for small businesses which presents significant uncertainty as to our ability to secure replacement financing and the terms of such financing if it is available. The current housing and mortgage markets also present uncertainty as to our ability to achieve sufficient positive cash flow from operations required to satisfy our debt obligations and meet financial covenant requirements.

        While we are striving to restructure our debt through the Chapter 11 Cases, if we are not successful, we do not believe that our cash, cash equivalents and future real estate sales proceeds will be sufficient to meet our debt obligations as currently structured or to meet anticipated operating and project development costs for Brightwater, and general and administrative expenses during the next 12 months, which raises 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.

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Nasdaq Delisting Notice

        On October 28, 2009, we received a letter from Nasdaq notifying us that it had determined to delist our common stock from trading as a result of our commencement of the Chapter 11 Cases. We appealed the Nasdaq determination on December 3, 2009 and, on December 29, 2009, the Nasdaq Hearings Panel granted our request to remain listed, subject to certain conditions. The Panel's continued listing decision is conditioned upon us (1) providing periodic updates as to the status of the Brightwater credit facilities restructuring efforts; and (2) emerging from the Chapter 11 process no later than April 26, 2010. We do not believe that it will be possible to emerge from the Chapter 11 process by the April 26 deadline, and there can be no assurance that we receive the significant extension we intend to request in order to remain listed until the Chapter 11 Cases have been completed. Therefore, our common stock could be delisted which would halt trading on the Nasdaq Stock Market. Once delisted, our common stock would not be immediately eligible to trade over-the-counter on the OTC Bulletin Board or in the "Pink Sheets;" however, the common stock may become eligible for such trading if a market maker applies to quote the common stock in accordance with Securities and Exchange Commission ("SEC") Rule 15c2-11, and such application is approved. If our common stock is delisted, negative implications may be associated with the delisting, including potential loss in confidence in us by suppliers and customers and the loss of institutional investor interest in our common stock.

Overview of California Coastal Communities, Inc. and Recent Industry Events.

        We are a residential land development and homebuilding company with properties owned or controlled primarily in Orange County, California and also in Lancaster in Los Angeles county. Our primary asset is a 356-home luxury coastal community known as Brightwater in Huntington Beach, California. Our principal activities include:

•

obtaining zoning and other entitlements for land we own or for third parties under consulting agreements;

•

improving the land for residential development; and

•

designing, constructing and selling single-family homes in Southern California.

        Once our residential land is entitled, we may build homes, sell unimproved land to other developers or homebuilders, sell improved land to homebuilders, or participate in joint ventures with other developers, investors or homebuilders to finance and construct infrastructure and homes. The majority of our homes are designed to appeal to move-up homebuyers and are generally offered for sale in advance of their construction.

        During 2009 and 2008, we saw continued price depreciation and an excess supply of homes available for sale in the Inland Empire and Lancaster markets. As a result of declining markets and overleveraged projects, we decided to exit these markets during 2009 and successfully implemented this strategy as described below.

        On March 31, 2009, our homebuilding subsidiary, Hearthside Homes, Inc., completed a deed-in-lieu transaction for the Hearthside Lane project in Corona, California and recognized a pre-tax gain on debt restructuring of $20.7 million. In exchange for a $28.7 million reduction in the loan balance secured by the project, the subsidiary conveyed the remaining 134 finished lots to the lender. The subsidiary retained seven completed homes which secured the remaining note balance of $2.5 million and delivered all seven homes during 2009. The remaining note has been repaid in its entirety.

        On September 30, 2009, a subsidiary of Hearthside Homes completed a sale of 62 finished lots and four model homes for $2.3 million, thereby disposing all remaining assets of the Woodhaven project in

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Beaumont, California. The lender for the loan secured by the project accepted the proceeds of the sale in full satisfaction of the outstanding debt. As a result, we recognized a $4.1 million pre-tax gain on debt restructuring during the third quarter of 2009.

        On December 29, 2009, a subsidiary of Hearthside Homes completed a sale of 54 finished lots for its Las Colinas project in Lancaster, California for $3.1 million and the principal amount of the project loan was repaid in full. The lender has claimed an additional amount due for delinquent interest and related loan costs of approximately $500,000, which remains unresolved.

        In view of the continuing significant economic downturn in the housing market, during 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 2010, our primary goals will be to:

•

have our plan of reorganization to restructure our obligations under the Term Loan and the Revolving Loan confirmed by the Bankruptcy Court as soon as possible, which would enable us to emerge from Chapter 11 bankruptcy during 2010; and

•

continue constructing, selling and delivering homes at Brightwater.

        There can be no assurance that we will accomplish, in whole or in part, all or any of these strategic goals or any other strategic goals or opportunities that we may pursue.

        Our total revenues for the years ended December 31, 2009, 2008, and 2007 were $47.2 million, $46.0 million, and $47.0 million respectively. For the years ended December 31, 2009, 2008, and 2007, we delivered 49, 55, and 77 homes, respectively. Our total assets as of December 31, 2009 and 2008 were $249.9 million and $312.5 million, respectively, with Brightwater and other nearby properties constituting $234.8 million (94% of total assets) and $238.5 million (76% of total assets), respectively. Our homebuilding subsidiary, Hearthside Homes, Inc., has delivered over 2,200 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 6 and 7 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 December 31, 2009, we had $204.0 million of debt against $33.4 million of book equity.

        We were formed in 1988 and our executive offices are located at 6 Executive Circle, Suite 250, Irvine, California 92614. Our website address is http://www.californiacoastalcommunities.com and our telephone number is (949) 250-7700. Through our website we make available our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to these reports filed or furnished pursuant to Section 13(d) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after they are filed with, or furnished to, the Securities and Exchange Commission. Copies of our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to these reports are available free of charge upon request. In addition, at our website: http://www.californiacoastalcommunities.com, we post copies of our Securities and Exchange Commission filings and press releases, as well as current versions of our code of ethics, audit committee charter and nominating committee charter.

Our Current and Future Homesites

        Our homebuilding operations include active projects in the Huntington Beach area of Southern California. We delivered 49 homes during the year ended December 31, 2009, compared with 55

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deliveries during 2008. We acquired no single-family residential lots during 2009 and 2008 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 December 31, 2009:

Project	Location	Land Acquisition		Commenced Construction			Commenced Sales			Models (a)		Backlog		Standing Inventory		Specs Under Construction		Remaining Lots		Total Lot Inventory
Brightwater in Orange County:
The Trails	Huntington Beach		1970		2006			2007			4		3		1		4		21		33
The Sands	Huntington Beach		1970		2006			2007			4		1		2		1		55		63
The Cliffs	Huntington Beach		1970		2006			2008			4		4		2		1		89		100
The Breakers	Huntington Beach		1970		2006			2008			5		1		3		1		87		97
	Subtotal—Orange County										17		9		8		7		252		293
Lancaster:
Unimproved lots	Lancaster		2005		(b	)		(b	)		—		—		—		—		73		73
	Total—All Projects										17		9		8		7		325		366

(a)

We sold our 17 Brightwater models to an independent third-party investor on December 31, 2008; however, the transaction is accounted for as a financing and therefore those homes are included in our home inventories.

(b)

To be determined subject to market conditions.

        As of December 31, 2009, we had standing inventory of eight Brightwater homes. During the year ended December 31, 2009, net new orders decreased to 50 homes compared with 58 homes during 2008, primarily due to fewer active communities in 2009. Cancellations as a percentage of new orders were 11% during the year ended December 31, 2009 (14% at Brightwater and 6% at our inland projects), compared with approximately 27% during 2008. Backlog as of December 31, 2009 increased to nine homes compared with eight homes as of December 31, 2008.

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 recently 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 December 31, 2009. 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

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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 December 31, 2009, we have delivered an aggregate of 63 homes (excluding the 17 model homes) at Brightwater, including 29, 16, nine, and nine 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.

•

Build-out of production homes, which is subject to market conditions, is currently expected to take approximately five years and be completed in 2014.

•

Costs to improve the lots from their raw condition to finished lots, including County permits, City annexation fees and school fees, approximate $200,000 per lot. As of December 31, 2009, approximately 76% of these lot improvement costs have already been incurred.

•

The direct costs (excluding indirect costs such as supervision, overhead, sales and marketing, warranty, insurance, etc.) of building homes at Brightwater are currently expected to range from approximately $125 to $140 per square foot.

•

Indirect costs are expected to approximate 6% of sales revenues.

•

Based on current sales price and cost projections, the various Brightwater products are currently expected to generate gross margins of approximately 5% to 22% due to our low carrying value in Brightwater. Gross margins for the larger homes at The Cliffs and The Breakers are currently expected to approximate 17% to 22%, while gross margins at The Trails and The Sands are currently expected to approximate 5% to 14%. The decrease in expected margins reflects expected increases in interest rates in connection with restructuring our debt, price reductions required to be competitive under current market conditions, additional incentives to sell standing inventory and greater use of third-party real estate brokers.

        The estimation process involved in the determination of value is inherently uncertain because it requires estimates as to future events and market conditions. This estimation process assumes our ability to complete development and disposition of our real estate inventories in the ordinary course of business based on management's 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 project's carrying value.

        In view of the continuing downturn in the housing market, we currently expect that during the next 12 months our new home construction will be limited to our 356-home Brightwater project in Huntington Beach.

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        Deliveries for the years ended December 31, 2009, 2008, and 2007 were as follows:

		Deliveries
	Location	2009		2008		2007
Brightwater
The Trails	Huntington Beach		18		6		5
The Sands	Huntington Beach		6		6		4
The Cliffs	Huntington Beach		3		6		—
The Breakers	Huntington Beach		4		5		—
	Total Brightwater		31		23		9
Inland Empire/Lancaster
Completed Projects	Various		—		13		43
Woodhaven(a)	Beaumont		9		6		10
Hearthside Lane	Corona		7		7		3
Las Colinas(b)	Lancaster		2		6		12
Future Community	Lancaster		—		—		—
	Total Inland Empire/Lancaster		18		32		68
	Total Deliveries		49		55		77

(a)

Excluding the September 30, 2009 sale of 62 finished lots.

(b)

Excluding the December 29, 2009 sale of 54 finished lots.

        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. As of March 29, 2010, 12 Brightwater homes (including two homes with wetland and ocean views) are in escrow at an average price of $1.3 million, or approximately $511 per square foot, and 13 additional homes are completed or under construction and have been released for sale.

The Trails and The Sands

        We delivered 24 and 12 homes at The Trails and The Sands during 2009 and 2008, respectively, and generated $21.1 million and $12.3 million in revenue, respectively and gross operating margins of 10.7% and 28.6%, respectively. The decrease in margins reflects expected increases in interest rates in connection with restructuring our debt, price reductions required to be competitive under current market conditions, additional incentives to sell standing inventory and greater use of third-party real estate brokers. Homes at The Trails and The Sands are presently being offered at prices ranging from $810,000 to $1.0 million. As of March 29, 2010, six homes are in escrow at The Trails and The Sands, three homes are completed and unsold, and six homes are under construction and unsold.

The Cliffs and The Breakers

        We delivered seven and 11 homes at The Cliffs and The Breakers during 2009 and 2008, respectively, and generated revenue of $15.9 million and $21.0 million, respectively, and gross operating

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margins of 30.0% and 35.1%, respectively. Homes at The Cliffs and The Breakers are presently being offered at prices ranging from $1.3 million to $3.2 million for 2,724 to 4,339 square foot homes. We have delivered two additional homes at The Cliffs and The Breakers since December 31, 2009. As of March 29, 2010, six homes are in escrow at The Cliffs and The Breakers, three homes are completed and unsold, and one home is under construction and unsold.

        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 has improved. 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.

Completed Projects

        Corona.    On March 31, 2009, we completed a deed-in-lieu transaction with the investor that purchased the loan secured by the Hearthside Lane project. In exchange for a $28.7 million reduction in the note balance and waiver of other costs, we conveyed 134 remaining finished lots to the investor and assigned approximately $1.7 million of restricted cash. We retained seven completed homes which secured the then remaining note balance of $2.5 million. During the second and third quarters of 2009, the subsidiary delivered the remaining seven homes at an average price of $427,000 and fully repaid the remaining note balance.

        Beaumont.    We acquired 102 lots in the City of Beaumont during 2005. Following construction of infrastructure and model homes, sales of homes averaging 2,500 square feet commenced during the first quarter of 2006 and we delivered 31 homes from 2006 through 2008. During 2009, we delivered nine homes, including the remaining four model homes (as part of a bulk sale), at an average price of $184,000. During the third quarter of 2009, we also sold the remainder of the project consisting of 62 finished lots for $1.8 million. This transaction extinguished the related project debt and related guaranty for less than 100% of the principal balance.

        Lancaster.    In 2005, we acquired 77 lots in an area known as Quartz Hill in the City of Lancaster. The homes in this community are on 10,000 square foot lots and average 3,640 square feet. We opened for sales during July 2006 and delivered 21 homes from 2006 through 2008. During 2009, we delivered the final two constructed homes at an average price of $282,000, including the final model home, and on December 29, 2009 we completed a bulk sale of the remaining 54 finished lots for $3.1 million.

Strategic Alternatives

        Our Board of Directors and management have always been and continue to be committed to enhancing value for all stockholders. Prior to commencement of the Chapter 11 Cases, from time to time, we have considered the various strategic alternatives available to us with respect to our businesses, assets, operations and available cash. We have engaged investment bankers and other advisors for this purpose, with a view towards assessing alternatives which would enhance the value of our current businesses, create additional business opportunities, or otherwise maximize the value of our company for our stockholders. Included in this process has been an exploration of merger, acquisition and disposition possibilities; analysis of equity and debt financings; open market and other repurchases of our stock; dividends and other distributions to our stockholders; and combinations of these alternatives.

        Following completion of the Chapter 11 Cases, and as we continue to develop Brightwater, we will evaluate available strategic alternatives that will maximize value to our stockholders.

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Product Design

        We contract with outside architects, designers, engineers, consultants and subcontractors. We believe that the use of third parties for the production of the final design, engineering and construction reduces our costs, increases design innovation and quality, and reduces risks. We have a number of plans which we have used in various projects which can be re-used in new projects with appropriate modifications as necessary. We offer options and upgrades to provide our homebuyers with opportunities to customize their home to fit their lifestyle. The extent of such options and upgrades varies depending upon the project. However, we generally try to limit structural and other changes which impact the build time of the home.

        We create architectural variety within our projects by offering numerous models, floor plans, and exterior styles in an effort to enhance home values by creating diversified neighborhood appearances within our projects. The majority of these homes are designed to appeal to move-up homebuyers and are generally offered for sale in advance of their construction. Generally, we select the exterior finishes of our homes subject to necessary architectural approvals. We offer homebuyers the opportunity to engage interior design consultants to personalize the interior of their homes. These services are offered at an additional cost to buyers through third parties contracted with by us, or the services may be provided through the homebuyer's own consultants.

Construction and Development

        We act as the general contractor for the construction of our projects. All of our construction work is performed by subcontractors. Our employees coordinate the construction of each project and the activities of subcontractors and suppliers, and subject their work to quality and cost controls and compliance with zoning and building codes. Subcontractors typically are retained on a phase-by-phase basis to complete construction at a fixed price. Agreements with our subcontractors are generally entered into after competitive bidding on a project-by-project basis. We have established relationships with various subcontractors and are not dependent to any material degree upon the services of any one subcontractor.

        We develop our residential projects in several phases generally ranging from approximately four to 12 homes per phase. We determine the number of homes to be built in the first phase and the appropriate price range. The first phase of home construction is typically relatively small to reduce risk while we measure consumer demand. Construction generally does not begin until some sales have occurred, except for construction of model homes and in some cases the first few production homes. Subsequent phases are generally not started until 80% to 100% of the homes in the previous phase have been sold. Sales prices in the second phase are then adjusted to reflect market demand as evidenced by sales experience in the first phase. With each subsequent phase, we continue to accumulate data which enables us to make decisions on the pricing, timing and size of subsequent phases. Due to the prolonged, ongoing downturn in the homebuilding industry, and reduced sales pace of the larger Cliffs and Breakers homes at Brightwater, we have limited construction and development of unsold homes for these products and generally commence construction once a house is sold. Although the time required to complete a phase varies from development to development depending on the factors above and the build time, which in turn varies generally with the size and complexity of the home, we typically complete construction of a phase within one of our developments in approximately five to eight months. We are continuously developing and refining our production practices in order to reduce cycle time within the construction process.

        In view of the continuing downturn in the housing market, we currently expect that, during the next 12 months, our new home construction will be limited to our 356-home Brightwater project in Huntington Beach.

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Sales and Marketing

        We typically build, furnish and landscape model homes for each residential project and maintain on-site sales offices, which are usually open seven days a week. We generally sell all of our homes through our sales representatives working from the sales offices located at the model homes used in each subdivision. Since 2008, we have used cooperative brokers to sell our homes. We conduct preliminary research concerning the credit status of each potential homebuyer in order to "pre-qualify" the homebuyer. Once the prospective homebuyer has been "pre-qualified" and there is a strong indication that the homebuyer will qualify for a mortgage (although final loan approval is still pending), the homebuyer must submit an "earnest money deposit" usually ranging from $35,000 to $70,000 at Brightwater, and complete a purchase contract for the purchase of their home. We attempt to keep our contract cancellation rate low by pre-qualifying prospective homebuyers and by allowing homebuyers to customize their homes at an early point in the purchase process in exchange for additional deposits. We provide flooring and other amenities and upgrades to our homebuyers through the various vendors with which we contract. When home purchase contracts are canceled, we retain the deposits of non-contingent buyers and seek to identify alternative homebuyers.

        We make extensive use of advertising and promotional resources, including our website, newspaper and magazine advertisements, brochures, direct mail and the placement of strategically located signs. Because Brightwater is a multi-project community, we are able to place community-wide advertising that highlights all of the projects within the community.

Backlog

        Backlog represents the number of our homes that are under sales contracts. Sales of our homes are made pursuant to standard sales contracts, which require a customer deposit at the time of execution. We generally permit customers to cancel their obligations and obtain refunds of all or a portion of their deposits if they are unable to close on the sale of their existing home, fail to qualify for financing or under certain other circumstances. A home sale enters backlog status upon execution of such a contract and receipt of an earnest money deposit and is removed when such contracts are canceled as described above, or the home purchase escrow is closed. We do not recognize revenue on homes under sales contracts until the sales are closed and title passes to the new homeowners.

        Our backlog at December 31, 2009 was nine homes compared with eight homes in backlog at year-end 2008 and five homes at December 31, 2007. The aggregate sales value of our backlog was $13.8 million at December 31, 2009, compared with $17.0 million at December 31, 2008. Our backlog ratio was 58.8% for the fourth quarter of 2009 and 75.0% for the fourth quarter of 2008. Backlog ratio is defined as unit deliveries during a quarter as a percentage of beginning backlog for the quarter. Approximately 20% of our deliveries in 2009 (excluding land sales comprised of 116 finished lot deliveries) occurred in the fourth quarter, compared with 27% during the fourth quarter of 2008 due to a reduced number of active communities at the end of 2009, and a reduced sales pace during the fourth quarter due in part to prospective buyers' concern regarding the outcome of our Chapter 11 bankruptcy proceedings.

Competition

        The homebuilding industry is highly competitive and fragmented. Most of our competitors have substantially greater financial resources than we do, and they have much larger staffs and marketing organizations. Currently, our only active project is located in Huntington Beach, California where there are very limited opportunities to build new home communities. We believe we compete effectively in our existing market as a result of our product design, development expertise, and our reputation as a producer of quality homes. We compete for homebuyers on the basis of a number of interrelated factors including location, price, reputation, amenities, design, quality and financing. In addition to

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competition for homebuyers, we also compete with other homebuilders for desirable properties, raw materials and reliable, skilled labor.

Mortgage Services

        We offer mortgage services to our homebuyers through cooperative relationships with experienced mortgage loan brokers who identify appropriate lenders for our buyers.

Regulation

        The housing and land development industries are subject to increasing environmental, building, zoning and real estate sales regulations by various federal, state and local authorities. Such regulations affect home building by specifying, among other things, the type and quality of building materials that must be used, certain aspects of land use and building design, as well as the manner in which we conduct sales activities and otherwise deal with our customers. Such regulations affect development activities by directly affecting the viability and timing of projects.

        We must obtain the approval of numerous government authorities which regulate such matters as land use and level of density, the installation of utility services, such as water and waste disposal, and the dedication of acreage for open space, parks, schools and other community purposes. If these authorities determine that existing utility services will not adequately support proposed development (including possibly in ongoing projects), building moratoria may be imposed. As a result, we devote an increasing amount of time to evaluating the impact of governmental restrictions imposed upon a new residential development. Furthermore, as local circumstances or applicable laws change, we may be required to obtain additional approvals or modifications of approvals previously obtained or even stop all work. These increasing regulations may result in a significant increase in time (and related carrying costs) between our initial acquisition of land and the commencement and completion of our developments. In addition, the extent to which we participate in land development activities subjects us to greater exposure to regulatory risks.

        The residential homebuilding industry is also subject to a variety of local, state, and federal statutes, ordinances, rules, and regulations concerning the protection of health and the environment. These environmental laws include such areas as storm water and surface water management, soil, groundwater and wetlands protection, subsurface conditions and air quality protection and enhancement. Environmental laws and existing conditions may result in delays, may cause us to incur substantial compliance and other costs and may prohibit or severely restrict homebuilding activity in environmentally sensitive regions or areas.

Raw Materials

        Typically, all the raw materials and most of the components used in our business are readily available in the United States. Most are standard items carried by major suppliers. However, a rapid increase in the number of homes started could cause shortages in the availability of such materials or in the price of services, thereby leading to delays in the delivery of homes under construction. In addition, high prices of lumber and other materials have had a negative impact on margins during periods of strong demand, but have moderated during the housing downturn. We continue to monitor the supply markets to achieve the best prices available.

Homeowner Warranty

        We provide homeowners with a limited warranty for the items listed in the homeowner warranty manual, which does not include items that are covered by manufacturers' warranties (such as appliances and air conditioning) or items that are not installed by our employees or contractors (such as flooring installed by an outside contractor employed by the homeowner). Statutory requirements in California

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may grant homebuyers rights in addition to those that we provide. Our ability to satisfy our warranty obligations is dependent upon the outcome of the Chapter 11 Cases as discussed above in Item 1—Business.

Environmental and Regulatory Matters

        Before we can develop a property, we must obtain a variety of discretionary approvals from local and state governments, as well as the federal government in certain circumstances, with respect to such matters as zoning, subdivision, grading, architecture and environmental matters. The entitlement approval process is often a lengthy and complex procedure requiring, among other things, the submission of development plans and reports and presentations at public hearings. Because of the provisional nature of these approvals and the concerns of various environmental and public interest groups, the approval process can be delayed by withdrawals or modifications of preliminary approvals and by litigation and appeals challenging development rights. We may also be subject to periodic delays or may be precluded entirely from developing in certain communities due to building moratoriums or "slow-growth" or "no-growth" initiatives that could be implemented in the future.

        We have expended and may continue to expend significant financial and managerial resources for compliance with environmental regulations and local permitting requirements. Although we believe our operations are generally in compliance with applicable environmental regulations, certain risks of unknown costs and liabilities are inherent in developing and owning real estate. We do not believe that such costs will have a material adverse effect on our business, financial condition or results of operations. The currently identifiable risks and uncertainties regarding other matters are discussed below in Item 3—Legal Proceedings and in Notes 10 and 12 to the Consolidated Financial Statements beginning on page F-2 below.

Corporate Indemnification Matters

        We, and our predecessor and affiliated companies, have disposed of numerous assets and businesses since 1986. Most of these dispositions have involved businesses that are unrelated to our current operations. By operation of law or contractual indemnity provisions, we may have retained liabilities relating to certain of these assets and businesses. There is generally no maximum obligation or amount of indemnity provided for these liabilities. A portion of these liabilities is supported by insurance or by indemnities from certain of our previously affiliated companies. We believe our balance sheet reflects adequate reserves for these matters. More information on our contingent indemnity and environmental obligations is described below in Item 3—Legal Proceedings and Note 12 to the Consolidated Financial Statements beginning on page F-2 below.

Employees

        As of March 29, 2010 we and our subsidiary companies had 33 full-time equivalent employees. We believe that our relations with our employees are good. No employees are represented by a collective bargaining agreement.

Seasonality

        The rate of orders for new homes is highly dependent on the number of active communities and the timing of new community openings. We have typically delivered a greater percentage of homes in the second half of the fiscal year compared with the first half due in part to the timing of land acquisitions and the ensuing course of development and construction required prior to delivering homes. Historically, the number of homes sold during the spring and summer months is greater than other periods during the year, and new home deliveries trail orders for new homes by up to six months. As a result, our revenues and operating earnings from sales of homes have been significantly higher in

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the second half of our fiscal year in prior years. In 2009, approximately 61% of our deliveries occurred during the second half of the year compared with approximately 58% during 2008.

Available Information

        We file annual, quarterly and special reports, proxy statements and other information with the Securities and Exchange Commission. You may read and copy any materials we file with the Securities and Exchange Commission at its Public Reference Room at 450 Fifth Street, N.W., Washington, DC 20549. You also may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Our Securities and Exchange Commission filings are available to the public at the SEC's website at http://www.sec.gov. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference room.

        We encourage the public to read our periodic and current reports and other information about us which are available at our website: http://www.californiacoastalcommunities.com. We think these reports provide additional information which prudent investors will find important. A copy of these filings as well as any future filings may be obtained, at no cost, by writing to our investor relations representative: Shareholder Services, 225 West Station Drive, Suite 545, Pittsburgh, PA 15219.

Item 1A.    Risk Factors

        In addition to the risks previously mentioned, the following important risk factors could adversely impact our business. These risk factors could cause our actual results to differ materially from the forward-looking and other statements that we make in periodic reports and other filings with the SEC, and that we make from time to time in our news releases, annual reports and other written communications, as well as other statements made from time to time by our representatives. If any of the following risks develop into actual events, our business, financial condition, results of operations, cash flows, strategies and prospects could be materially adversely affected.

Factors may affect our future results (Cautionary Statements Under the Private Securities Litigation Reform Act of 1995).

        This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Exchange Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that relate to future events or our future financial performance. In addition, other statements we may make from time to time, such as press releases, oral statements made by our officials and other reports that we file with the Securities and Exchange Commission may also contain such forward-looking statements. Undue reliance should not be placed on these statements which involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential," "continue," or the negative of such terms or other comparable terminology.

        These forward-looking statements include, but are not limited to:

•

the impact, effect and eventual result of the Chapter 11 Cases in restructuring our debt obligations under the Revolving Loan and Term Loan through;

•

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;

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•

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 the 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, and 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.

        Any or all of the forward-looking statements included in this report and in any other reports or public statements made by us are not guarantees of future performance and 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 recent national credit market crisis; inflation and the recession; our ability to comply with the covenants and amortization schedules contained in our Revolving and Term Loan agreements; the demand for homes; adverse market conditions that could result in additional inventory impairments, including an oversupply of unsold homes and declining home prices, among other things; 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

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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 2010 reports on Forms 10-Q and 8-K should be consulted.

        These forward-looking statements should be considered in light of the information included in this report and our other filings with the Securities and Exchange Commission, including, without limitation, the "Risk Factors" set forth below, as well as the description of trends and other factors in the "Management's Discussion and Analysis of Financial Condition and Results of Operations," section of this Form 10-K. You should also read the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section in conjunction with the audited consolidated financial statements and the related notes that appear elsewhere in this report.

        The following cautionary discussion of risks, uncertainties and possible inaccurate assumptions relevant to our business includes factors we believe could cause our actual results to differ materially from expected and historical results. Other factors beyond those listed below, including factors unknown to us and factors known to us which we have not determined to be material, could also adversely affect us. This discussion is provided as permitted by the Private Securities Litigation Reform Act of 1995, and all of our forward-looking statements are expressly qualified in their entirety by the cautionary statements contained or referenced in this section.

BANKRUPTCY RISKS

We filed for protection under Chapter 11 of the Bankruptcy Code.

        As more fully described in Item 1—Business, we and the other Debtors filed the Chapter 11 Cases on October 27, 2009 and we continue to operate our business as it relates to these Debtors as debtors-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of Chapter 11. Our operations, including our ability to execute our business plan, have been and will remain subject to the risks and uncertainties that are inherently associated with bankruptcy proceedings. Risks and uncertainties associated with these proceedings include, but are not limited to the following:

•

Actions and decisions of our creditors and other third parties with interests in our Chapter 11 Cases, which may be inconsistent with our plans;

•

Our ability to obtain court approval with respect to motions made from time to time in the Chapter 11 Cases that we believe are in the best interests of our business operations, including those relating to our continuation as a debtor-in-possession;

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•

Our ability to develop, prosecute, confirm, and consummate a plan of reorganization with respect to the Chapter 11 Cases;

•

Our ability to obtain and maintain commercially reasonable terms with vendors and service providers;

•

Our ability to maintain contracts that are critical to our operations;

•

Our ability to retain management and other key individuals; and

•

We may encounter third parties seeking and obtaining Bankruptcy Court approval to terminate or shorten the exclusivity period for us to propose and confirm a plan of reorganization, to terminate our status as a debtor-in-possession, to appoint a trustee under Chapter 11, or to convert the Chapter 11 Cases into liquidations under Chapter 7 of the Bankruptcy Code.

        These risks and uncertainties could affect our business and operations in various ways. For example, negative events or publicity associated with the proceedings could adversely affect our home sales and relationships with our customers, as well as with vendors and employees, which in turn could adversely affect our operations and financial condition, particularly if the Chapter 11 Cases are protracted. Also, transactions outside the ordinary course of business are subject to the prior approval of the Bankruptcy Court, which may limit our ability to respond timely to certain events or take advantage of certain opportunities. In addition, in order to successfully emerge from the Chapter 11 Cases, senior management will be required to spend significant amounts of time developing a comprehensive plan of reorganization, instead of concentrating exclusively on business operations. These proceedings and the development of a plan of reorganization may result in the sale or divestiture of assets, but there can be no assurance that we will be able to complete any sale or divestiture on acceptable terms or at all.

        Because of the risks and uncertainties associated with the proceedings, the ultimate impact that events which occur during these proceedings will have on our business, financial condition and results of operations cannot be accurately predicted or quantified. There can be no assurance as to what values, if any, will be ascribed in the Chapter 11 Cases to our various pre-petition assets, liabilities, common stock, and other securities.

Our cash flow from operations may not provide sufficient liquidity during the remainder of the Chapter 11 Cases.

        In the event that cash flows from our home sales are not sufficient to meet our liquidity requirements, we may be required to seek additional financing. There can be no assurance that such additional financing would be available or, if available, would be offered on acceptable terms. Failure to secure any necessary additional financing would have a material adverse impact on our operations and ongoing viability.

Our liquidity position imposes significant challenges to our ability to continue operations.

        As global economic conditions have deteriorated, we have experienced significant pressure on our business, including our liquidity position. The Chapter 11 Cases may increase this pressure. Because of the public disclosure of our liquidity constraints, our ability to maintain normal credit terms with suppliers may become impaired. If liquidity problems persist, suppliers could refuse to provide key products and services in the future. Our financial condition and results of operations, in particular with regard to our potential failure to meet debt obligations, may lead some customers to become reluctant to enter into home purchase agreements with us. In addition to the cash requirements necessary to fund continuing operations, we have incurred and will continue to incur significant professional fees and other restructuring costs in connection with the Chapter 11 Cases. The above factors raise substantial doubt about our ability to continue as a going concern.

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During the pendency of the Chapter 11 Cases, our financial results may be unstable and may not reflect historical trends.

        During the pendency of the Chapter 11 Cases, our financial results may fluctuate as they reflect asset impairments, asset dispositions, restructuring activities, contract terminations and rejections, and claims assessments. As a result, our historical financial performance may not be indicative of the financial performance following the commencement of the Chapter 11 Cases. Further, we may sell or otherwise dispose of assets or businesses and liquidate or settle liabilities, with court approval, for amounts other than those reflected in the Company's historical financial statements. Any such sale or disposition and any comprehensive restructuring plan could materially change the amounts and classifications reported in our historical consolidated financial statements, which may not give effect to any further adjustments to the carrying value of assets or amounts of liabilities that might be necessary as a consequence of our restructuring plan.

We may not be able to obtain confirmation of a Chapter 11 plan of reorganization submitted for Bankruptcy Court approval.

        In order to successfully emerge from Chapter 11 as a viable entity, we believe that we must develop, and obtain requisite court and creditor approval of a feasible Chapter 11 plan of reorganization. This process requires us and the other Debtors to meet certain statutory requirements with respect to adequacy of disclosure with respect to the plan of reorganization, soliciting and obtaining creditor acceptances of the plan, and fulfilling other statutory conditions for confirmation. We and the other Debtors may not receive the requisite acceptances to confirm the plan. Even if the requisite acceptances of the plan of reorganization are received, the Bankruptcy Court may not confirm the plan. A dissenting holder of a claim against the Debtors may challenge the balloting procedures and results as not being in compliance with the Bankruptcy Code. Even if the Bankruptcy Court determined that the balloting procedures and results were appropriate, the Bankruptcy Court could still decline to confirm the plan of reorganization if it found that any of the statutory requirements for confirmation had not been met, including that the terms of the plan are fair and equitable to non-accepting classes. Section 1129 of the Bankruptcy Code sets forth the requirements for confirmation and requires, among other things, a finding by the Bankruptcy Court that (i) the plan of reorganization "does not unfairly discriminate" and is "fair and equitable" with respect to any non-accepting classes, (ii) confirmation of the plan is not likely to be followed by a liquidation or a need for further financial reorganization and (iii) the value of distributions to non-accepting holders of claims within a particular class under the plan will not be less than the value of distributions such holders would receive if the Debtors were to be liquidated under Chapter 7 of the Bankruptcy Code.

        The Bankruptcy Court may determine that the plan of reorganization does not satisfy one or more of these requirements, in which case it would not be confirmable by the Bankruptcy Court. If the plan of reorganization is not confirmed by the Bankruptcy Court, it is unclear whether we would be able to reorganize our businesses and what, if any, distributions holders of claims against us would ultimately receive with respect to their claims. If an alternative reorganization could not be agreed upon, it is possible that we would have to liquidate our assets, in which case it is likely that holders of claims would receive substantially less favorable treatment than they would receive if we were to emerge as a viable, reorganized entity.

The Chapter 11 Cases have consumed and will consume a substantial portion of the time and attention of our corporate management and will impact how our business is conducted, which may have an adverse effect on our business and results of operations.

        The requirements of the Chapter 11 Cases has consumed and will continue to consume a substantial portion of our corporate management's time and attention and leave them with less time to devote to the operations of our business. This diversion of corporate management's attention may have

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a material adverse effect on the conduct of our business, and, as a result, on our financial condition and results of operations, particularly if the Chapter 11 Cases are protracted.

        A prolonged period of operating under Chapter 11 will also make it more difficult to attract and retain management and other key personnel necessary to the success and growth of our business. In addition, the longer the Chapter 11 Cases continue, the more likely it is that our customers and suppliers will lose confidence in our ability to successfully reorganize and seek to establish alternative commercial relationships. Furthermore, so long as the Chapter 11 Cases continue, we will be required to incur substantial costs for professional fees and other expenses associated with the proceedings. A prolonged continuation of the Chapter 11 Cases may also require us to seek additional financing. If we require additional financing during the Chapter 11 Cases and we are unable to obtain the financing on favorable terms or at all, our chances of successfully reorganizing our businesses may be seriously jeopardized.

Our employees are facing considerable distractions and uncertainty due to the Chapter 11 Cases.

        As a result of the Chapter 11 Cases, our employees are facing considerable distractions and uncertainty. A material erosion of employee morale could have a material adverse effect on our business, particularly if the Chapter 11 Cases are protracted.

The Bankruptcy Court may impose significant operating and financial restrictions on us, compliance or non-compliance with which could have a material adverse effect on our liquidity and operations.

        Restrictions imposed by the Bankruptcy Court could adversely affect us by limiting our ability to plan for or react to market conditions or to meet our capital needs. We must obtain Bankruptcy Court approval to, among other things:

•

incur additional indebtedness and issue stock;

•

make prepayments on or purchase indebtedness in whole or in part;

•

pay dividends and other distributions with respect to our capital stock or repurchase our capital stock or make other restricted payments;

•

make investments;

•

enter into transactions with affiliates on other than arm's-length terms;

•

create or incur liens to secure debt;

•

consolidate or merge with another entity, or allow one of our subsidiaries to do so;

•

lease, transfer or sell assets and use proceeds of permitted asset leases, transfers or sales;

•

incur dividend or other payment restrictions affecting subsidiaries;

•

make capital expenditures beyond specified limits;

•

engage in specified business activities; and

•

acquire land to be developed or other businesses.

COMMON STOCK RISKS

Trading in our securities during the pendency of the Chapter 11 Cases is highly speculative and poses substantial risks.

        Trading prices for our common stock are very volatile. Accordingly, we urge that extreme caution be exercised with respect to existing and future investments in our equity securities.

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Potential Nasdaq Delisting.

        On October 28, 2009, we received a letter from Nasdaq notifying us that it had determined to delist our common stock from trading as a result of our commencement of the Chapter 11 Cases. We appealed the Nasdaq determination on December 3, 2009 and, on December 29, 2009, the Nasdaq Hearings Panel granted our request to remain listed, subject to certain conditions. The Panel's continued listing decision is conditioned upon us (1) providing periodic updates as to the status of the Brightwater credit facilities restructuring efforts, and (2) emerging from the Chapter 11 process no later than April 26, 2010. We do not believe that it will be possible to emerge from the Chapter 11 process by the April 26 deadline, and there can be no assurance that we receive the significant extension we intend to request in order to remain listed until the Chapter 11 Cases have been completed. Therefore, our common stock could be delisted which would halt trading on the Nasdaq Stock Market.

Risks of trading in an over-the-counter market.

        Once delisted, our common stock would not be immediately eligible to trade over-the-counter through the OTC Bulletin Board or in the "Pink Sheets;" however, the common stock may become eligible for such trading if a market maker applies to quote the common stock in accordance with SEC Rule 15c2-11, and such application is approved. If we do not meet the conditions for continued listing and our common stock is delisted, negative implications may be associated with the delisting, including potential loss in confidence in us by suppliers and customers and the loss of institutional investor interest in our common stock.

        The trading of our common stock on the over-the-counter marked rather than on Nasdaq may negatively impact the trading price of our common stock 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 (the "Exchange Act"), commonly referred to as the "penny stock rule."

        Securities traded in the over-the-counter market generally have significantly less liquidity than securities traded on a national securities exchange, through factors such as a reduction in the number of investors that will consider investing in the securities, the number of market makers in the securities, reduction in securities analyst and news media coverage and lower market prices than might otherwise be obtained. As a result, holders of shares of our common stock may find it difficult to resell their shares at prices quoted in the market or at all. Furthermore, because of the limited market and generally low volume of trading in our common stock that could occur, the share price of our common stock could be more likely to be affected by broad market fluctuations, general market conditions, fluctuations in our operating results, changes in the markets perception of our business, and announcements made by us, our competitors or parties with whom we have business relationships. With respect to the Company, in some cases, we may be subject to additional compliance requirements under applicable state laws in the issuance of our securities. The lack of liquidity in our common stock may also make it difficult for us to issue additional securities for financing or other purposes, or to otherwise arrange for any financing we may need in the future.

BUSINESS RISKS

The homebuilding industry has undergone a significant and sustained downturn which has, and could continue to, materially and adversely affect our business, liquidity and results of operations.

        The homebuilding and mortgage lending industries have experienced a significant and sustained downturn, which negatively impacted our financial and operating results during the years ended December 31, 2009 and 2008. Unprecedented levels of national concern over instability in the credit markets, along with concerns over the recession and elevated levels of unemployment, have exacerbated the decline in demand for new homes. The conditions experienced during 2009 include, among other

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things: reduced consumer confidence; significant concerns over the impact of higher-risk mortgage loan products on the banking system and financial markets; reduced availability and higher costs of mortgage loan financing; fluctuating energy costs; the absence of home price stability; and continued declines in the value of new homes. All of these factors have contributed to the significant decline in the demand for new homes. Moreover, the government's legislative and administrative measures aimed at providing relief to homeowners facing foreclosure may not effectively stabilize home prices and values or restore consumer confidence and increase demand in the homebuilding industry.

        As a result of these conditions we experienced both lower overall sales compared to prior years and downward pressure on our selling prices and margins in 2009, as competition increased the need for sales incentives. In addition, during 2009 we recorded $11.7 million of impairments to our real estate inventories in Southern California due to challenging market conditions and uncertainties resulting from our ongoing bankruptcy proceedings. The impairment charges were calculated based on current market conditions and current assumptions made by management, which may differ materially from actual results if market conditions change. If market conditions do not improve in future periods, we may decide not to pursue development and construction in additional areas, and the value of existing land holdings may continue to decline, which could lead to further write-offs for land impairments.

        If the downturn in the homebuilding and mortgage lending industries continues, or if the national economy experiences a "double-dip" recession, we could experience further declines in the market value and demand for our homes, which could have a significant negative impact on our gross margins from home sales and financial and operational results. Also, the prices of land and new homes, and the stock prices of companies like ours that build new homes, may decline further if the demand for new homes continues to weaken. A decline in the prices for new homes has had and would continue to have an adverse effect on our homebuilding business, in particular on our revenues and margins. A further decline in our stock price could also make financing or raising capital more difficult and expensive.

        We believe the principal factors that have caused this downturn include each of the following:

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declining homebuyer demand due to lower consumer confidence in the residential real estate market and an inability of many homebuyers to sell their existing homes;

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increased inventory of existing homes for sale, including the impact of increases in residential foreclosures;

•

reduced availability of mortgage financing due to the significant mortgage market disruptions;

•

decreased affordability of housing as a result of tightened credit standards for homebuyers; and

•

pricing pressures resulting from a variety of factors, including the decision of homebuilders to offer significant discounts and sales incentives to liquidate unsold inventories in order to generate cash, and the need for home prices to fall within mortgage qualification limits.

        During 2009, we, like many other homebuilders, faced a difficult sales environment and, while we delivered 31 Brightwater homes and 18 homes at our inland projects, we generated reduced margins. These conditions have led to, among other things, substantial land-related impairments at our inland projects which generated operating losses. As a result, our homebuilding operations at our inland projects incurred additional losses. While there are signs that the housing market in southern California may be stabilizing, any worsening in market conditions could have a further material adverse effect on our business and results of operations. We can provide no assurances that the homebuilding market will improve in the near future. In fact, we expect the market to remain challenged to varying degrees throughout 2010, which may have an adverse effect on our business and our results of operations.

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Our strategies in responding to the adverse conditions in the homebuilding industry may not be successful.

        While we continue to monitor and modify our strategies in responding to the current economic environment, the effectiveness of these strategies in future reporting periods is unknown. To the extent they are not successful, our financial and operating results may be adversely impacted. We have experienced significantly reduced gross operating profit levels and have incurred additional asset impairment charges in 2009 primarily for inland projects, which contributed to the net loss we recognized in 2009. Also, in 2009, notwithstanding our sales strategies, we continued to experience significant reductions in sales volume. We believe that the volatile cancellation rates largely reflected a decrease in homebuyer confidence based on sustained home price declines, increased offerings of sales incentives in the marketplace for both new and existing homes and generally poor economic conditions, and the filing of our Chapter 11 Cases, all of which prompted homebuyers to forgo or delay home purchases. The more restrictive mortgage lending environment and the inability of some buyers to sell their existing homes have also led to lower demand for new homes. Many of these factors affecting new orders are beyond our control. It is uncertain how long these factors will continue. To the extent that they do, we expect that they will have a negative effect on our business and our results of operations.

Market conditions in mortgage industries deteriorated significantly in 2008 and remained difficult in 2009, which adversely affected the availability of credit for home purchasers and reduced the number of potential mortgage customers.

        During 2008 and 2009, the mortgage lending and mortgage finance industries experienced significant instability due to, among other things, rising defaults on subprime loans and a resulting decline in the market value of such loans. In light of these developments, lenders, investors, regulators and other third parties questioned the adequacy of lending standards and other credit requirements for several loan programs made available to borrowers in recent years. This has led to reduced investor demand for mortgage loans and mortgage-backed securities, tightened credit requirements, reduced liquidity, increased credit risk premiums and regulatory actions. Deterioration in credit quality among subprime and other nonconforming loans has caused most lenders to eliminate subprime mortgages and most other loan products that do not conform to Fannie Mae, Freddie Mac, FHA or VA standards. Fewer loan products and tighter loan qualifications make it more difficult for some categories of borrowers to finance the purchase of our homes or the purchase of existing homes from potential move-up buyers who wish to purchase one of our homes. In general, these developments have resulted in a reduction in demand for the homes we sell and have delayed any general improvement in the housing market. While mortgage market conditions appear to be improving, there can be no assurance that continued limitations in the availability of mortgages will not adversely affect our business and results of operations in 2010.

We have incurred a significant amount of debt, and we may incur significant additional debt, which could prevent us from fulfilling our obligations and harm our financial health.

        As of December 31, 2009, our debt obligations totaled $204.0 million. In addition, subject to the restrictions in our credit facilities, we may incur significant additional indebtedness. There is no guarantee that additional borrowings would be available to us. In addition, as these and other factors change, the amount of additional senior borrowing we could incur under these restrictions could increase or decrease significantly.

        Our business may not generate sufficient cash flow from operations and borrowings may not be available to us under our credit facilities in an amount sufficient to enable us to fund our liquidity needs. We may need to refinance all or a portion of our debt on or before maturity, which we may not be able to do on favorable terms or at all.

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        The amount of our indebtedness could also have the following important consequences:

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making us more vulnerable to the ongoing downturn in our business or in general economic conditions;

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requiring us to dedicate a substantial portion of our cash flows from operations to payments on our debt and reducing our ability to use our cash flow for other purposes;

•

limiting our flexibility to engage in certain transactions or to plan for, or react to, changes in our business and the homebuilding industry;

•

limiting our ability to obtain future financing for working capital, capital expenditures, acquisitions, debt obligations and other general corporate requirements;

•

placing us at a disadvantage compared to competitors who have less debt than we do; and

•

make us more vulnerable in the event of a further downturn in our business or in general economic conditions.

        Our credit facilities impose restrictions on our operations and activities and require us to comply with certain financial covenants, including a maximum leverage ratio, minimum ratio of EBITDA to interest incurred, restrictions on debt incurrence, sales of assets and cash distributions by us. If we fail to comply with these restrictions or covenants, our debt could become due and payable prior to maturity.

        As a result of the sustained downturn in the homebuilding industry and the impairment charges we recorded during 2008, we amended our Revolving Loan and Term Loan credit facilities in September 2008 to provide for an option to extend the maturity of our Revolving Loan, to reschedule payments and to modify financial and other covenants in order to accommodate our 2008 and 2009 operating results.

        Our inability to obtain a further consensual amendment to these credit facilities led to the filing of the Chapter 11 Cases in order to, among other things, extend the maturity dates and change the repayment schedules to provide full repayment of the Revolving Loan by December 31, 2013 and the Term Loan by June 30, 2014. However, there can be no assurance that we 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. In addition, if we are successful in these endeavors, there can also be no assurance that we will not be required to seek further covenant or other amendments to our credit facilities, or that any such requested amendments will be agreed to by our post-bankruptcy lenders.

        Our ability to meet our post-bankruptcy debt service and other obligations will depend upon our future performance. We are engaged in businesses that are substantially affected by changes in economic cycles. Our revenues and earnings vary with the level of general economic activity in the markets we serve. Our business is also affected by customer sentiment and financial, political, business and other factors, many of which are beyond our control. The factors that affect our ability to generate cash can also affect our ability to raise additional funds for these purposes through the sale of equity securities, the refinancing of debt, or the sale of assets. Changes in prevailing interest rates may affect our ability to meet our debt service obligations, because borrowings under our loan agreements bear interest at floating rates. A higher interest rate on our debt service obligations could result in lower earnings.

        Our post-bankruptcy business may not generate sufficient cash flow from operations and borrowings may not be available to us under our loan agreements in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs. We may also need to refinance all or a portion of our debt on or before maturity, which we may not be able to do on favorable terms or at all.

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Failure to comply with the covenants and conditions imposed by the agreements governing our indebtedness could restrict future borrowing or cause our debt to become immediately due and payable.

        The post-bankruptcy agreements that will govern our credit facilities will impose restrictions on our operations and activities. Significant restrictions may require us to comply with financial covenants, limit investments, cash dividends, stock repurchases and other restricted payments, incurrence of indebtedness, and creation of liens and asset dispositions. We may also be required to receive an unqualified report from our independent registered accounting firm in connection with its annual audit of our financial statements. Moreover, we may curtail our investment activities and other uses of cash to maintain compliance with these restrictions and covenants. If we fail to comply with these restrictions or covenants, the lenders could cause our debt to become due and payable prior to maturity or could demand that we compensate them for waiving any instances of noncompliance. In such a situation, there can be no assurance that we would be able to obtain alternative financing, which could have a material adverse effect on our post-bankruptcy solvency. In the event we were to further amend our loan agreements, such amendments could result in less favorable terms and conditions, which could have a negative impact on our borrowing capacity and/or cash flows.

        Our ability to meet our post-bankruptcy debt service and other obligations will depend upon our future performance. Our business is substantially affected by changes in economic cycles. Our revenues, earnings and cash flows vary with the level of general economic activity and competition in the markets in which we operate. Our business could also be affected by financial, political and other factors, many of which are beyond our control. Changes in prevailing interest rates may also affect our ability to meet our debt service obligations because borrowings under our credit facilities bear interest at floating rates. A higher interest rate on our debt could adversely affect our operating results.

        Our post-bankruptcy business may not generate sufficient cash flow from operations and borrowings may not be available to us under our credit facilities in an amount sufficient to fund our liquidity needs. Should this occur, we may need to refinance all or a portion of our debt on or before maturity, which we may not be able to do on favorable terms or at all. Continued reductions in level of home deliveries, additional impairment charges and other financial performance factors may negatively impact our ability to comply with our financial covenants; and there can be no assurance that we will not violate the financial or other covenants under our loan agreements in the future.

Current credit market conditions present uncertainty as to our ability to secure additional financing, if needed, and the terms of such financing if it is available, and as to our ability to achieve positive cash flow from operations required to satisfy our obligations.

        There can be no assurance that we will be able to meet our post-bankruptcy covenants, payment schedules or our other requirements in our Revolving Loan and Term Loan credit facilities if market conditions worsen. If we are unable to comply with or meet any one or more of our obligations under these loans, we could be precluded from incurring additional borrowings and, in the event of default, our obligation to repay indebtedness outstanding under these loans could be accelerated in full. We can give no assurance that in such an event, we would have, or be able to obtain, sufficient funds to pay all debt we are required to repay.

Availability of Additional Liquidity

        The availability of additional capital, whether from private capital sources (including banks) or the public capital markets, fluctuates as market conditions change. There may be times when the private capital markets and the public debt or equity markets lack sufficient liquidity or when our securities cannot be sold at attractive prices, in which case we would not be able to access capital from these sources. Based on current market conditions, our ability to effectively access these liquidity sources is significantly limited. In addition, a further weakening of our financial condition, including in particular

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a material decrease in our profitability or cash flows, could adversely affect our ability to obtain necessary funds or otherwise increase our cost of borrowing.

        Moreover, due to the deterioration in the credit markets for small businesses such as ours and the uncertainties that exist in the general economy and for homebuilders in particular, we cannot be certain that we would be able to replace existing financing or secure additional sources of financing, and lenders may be unwilling to lend to us because we filed the Chapter 11 Cases .. In addition, the significant decline in our stock price, the ongoing volatility in the stock markets and the reduction in our stockholders' equity relative to our debt could also impede our access to the equity markets or increase the amount of dilution our stockholders would experience should we seek or need to raise capital through issuance of equity.

Our results of operations are subject to significant changes in the cost of raw materials and other components of our houses and labor that are dependent on or impacted by increases in energy costs.

        The cost of fuel and other sources of energy and other raw material costs may increase. Increases in energy costs would increase costs for our suppliers, who provide raw materials and the other components of our houses and infrastructure, and subcontractors, whose employees help construct our homes. Many of these cost increases are passed on to us, and these and any additional cost increases could materially and adversely affect our cost of sales and operating profits.

Changes in laws or other events that adversely affect liquidity in the secondary mortgage market could hurt our business.

        The government-sponsored enterprises, principally FNMA and FHLMC, play a significant role in buying home mortgages and creating investment securities that they either sell to investors or hold in their portfolios. These organizations provide liquidity to the secondary mortgage market. FNMA and FHLMC have recently experienced financial difficulties. Any new federal laws or regulations that restrict or curtail their activities, or any other events or conditions that prevent or restrict these enterprises from continuing their historic businesses, could affect the ability of our customers to obtain the mortgage loans or could increase mortgage interest rates or credit standards, which could reduce demand for our homes and/or the loans that we originate and adversely affect our results of operations.

        In addition, the Housing and Economic Recovery Act of 2008 prohibits, as of October 15, 2008, seller funded down payment assistance programs. As a result of these trends, the ability and willingness of prospective buyers to finance home purchases or to sell their existing homes has been adversely affected, which has adversely affected our operating results. These conditions may continue or worsen.

We may be unable to obtain suitable bonding for the development of our communities.

        We provide bonds to governmental authorities and others to ensure the completion of our projects. Our ability to obtain surety bonds primarily depends upon our past performance, capitalization, working capital, management expertise and certain external factors, including the overall capacity of the surety market and the underwriting practices of surety bond issuers. If we are unable to provide required surety bonds for our projects, our business operations and revenues could be adversely affected. As a result of the recent deterioration in market conditions, surety bond capacity has decreased and providers have become increasingly reluctant to issue new bonds and some providers are requesting credit enhancements in order to maintain existing bonds or to issue new bonds. If we are unable to obtain required bonds in the future, or are required to provide credit enhancements with respect to our current or future bonds, our liquidity could be negatively impacted.

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In the ordinary course of business, we are required to obtain performance bonds, the unavailability of which could adversely affect our results of operations and/or cash flows.

        As is customary in the homebuilding industry, we often are required to provide surety bonds to secure our performance under construction contracts, development agreements and other arrangements. If we were unable to obtain surety bonds when required, our results of operations and/or cash flows could be impacted adversely.

The homebuilding industry is highly competitive and, with more limited resources than many of our competitors, we may not be able to compete effectively.

        The homebuilding industry is highly competitive. We compete with numerous other residential construction firms, including large national and regional firms, for customers, land, financing, raw materials, skilled labor and employees. We compete for customers primarily on the basis of the location, design, quality and price of our homes and the availability of mortgage financing. Some of our competitors have substantially larger operations and greater financial resources than we do and as a result may have lower costs of capital, labor and materials than us, and may be able to compete more effectively.

        Many of our competitors are better capitalized and have lower leverage than we do, which may position them to compete more effectively on price (which can trigger impairments), better enable them to ride out the current industry-wide downturn and allow them to compete more effectively for land acquisitions when conditions improve.

We are subject to current credit market risks.

        Current credit market conditions for small businesses such as ours present uncertainty as to our ability to secure additional financing, if needed, and the terms of such financing if it is available, or as to our ability to achieve positive cash flow from operations to satisfy our obligations.

Our homebuilding operations lack geographic diversification.

        All of our developable land is in southern California and our business is especially sensitive to the economic conditions within southern California. Any adverse change in the economic climate of California, which is currently in a recession, or our region of that state, and any adverse change in the political or regulatory climate of California, or the counties where our land is located could adversely affect our real estate development activities. Our current homebuilding operations are limited to the counties of Orange and Los Angeles in Southern California. Because we do not have more diversified geographic operations, the following risk factors should be considered with extreme care given the potential material adverse effect on our limited operations that could occur if any of these risks become a reality.

Our business is cyclical and downward changes in economic conditions generally or in the market regions where we operate could further decrease demand and pricing for new homes in these areas.

        The residential homebuilding industry is sensitive to changes in economic conditions such as those which are listed below. Adverse changes in any of these conditions generally, or in the market regions where we operate, could decrease demand and pricing for new homes in these areas or result in customer cancellations of pending contracts, which could adversely affect the number of home deliveries we make or reduce the prices we can charge for homes, either of which could result in a decrease in our revenues and earnings.

        Our business is substantially affected by changes in national and general economic factors outside of our control, such as:

•

short and long term interest rates;

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•

the availability of financing for homebuyers;

•

consumer confidence (which can be substantially affected by external conditions, including international hostilities involving the United States);

•

consumer income;

•

federal mortgage financing programs; and

•

federal and state income tax provisions, including provisions for the deduction of mortgage interest payments.

        The cyclicality of our business is also highly sensitive to changes in economic conditions that can occur on a local or regional basis, such as changes in:

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housing demand;

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population growth;

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employment levels and job growth; and

•

property taxes.

        The factors described above can cause demand and prices for our homes to diminish or cause us to take longer and incur more costs to build our homes. We may not be able to recover these increased costs by raising prices because prices have been declining over the last three years and the price of each home is usually set several months before the home is delivered, as our customers typically sign their home purchase contracts before construction has even begun on their homes. In addition, some of the factors described above could cause some homebuyers to renegotiate for lower prices or cancel their home purchase contracts altogether.

Inflation may result in increased costs that we may not be able to recoup if demand declines.

        Inflation can have a long-term impact on us because increasing costs of land, materials and labor may require us to increase the sales price of homes in order to maintain satisfactory margins. However, inflation is often accompanied by higher interest rates, which can have a negative impact on housing demand, in which case we may not be able to raise home prices sufficiently to keep up with the rate of inflation and our margins could decrease.

Severe weather conditions and natural disasters could delay deliveries, increase costs and decrease demand for new homes in affected areas.

        Weather conditions and natural disasters such as earthquakes, landslides, floods, droughts, fires, extended periods of rain and other environmental conditions can harm our homebuilding business on a local or regional basis. Civil unrest can also have an adverse effect on our homebuilding business.

When mortgage-financing costs are high, or as credit quality declines, customers may be unwilling or unable to purchase our homes.

        The majority of our homebuyers finance their purchases through our relationships with Wells Fargo or third-party lenders. In general, housing demand is adversely affected by increases in interest rates and by decreases in the availability of mortgage financing as a result of declining customer credit quality, tightening of mortgage loan underwriting standards, or other issues. Our operating results may be adversely affected if mortgage interest rates increase or mortgage loans become more difficult to obtain, or the ability or willingness of prospective buyers to finance home purchases is adversely affected.

        The interest rates on jumbo mortgages have exceeded interest rates on conforming loans by as much as 170 basis points since August 2007, compared with a "normal" historical spread of 25 to 30

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basis points. As of February 2010, the spread has improved significantly, approximating 50 to 80 basis points. Since homes at Brightwater, our only active new home community, are priced in excess of the recent conforming loan ceiling of $417,000, these higher interest rates on jumbo mortgages have significantly reduced demand for our homes.

Some homebuyers may cancel their home purchases because the required deposits are small and generally refundable; or if buyers are concerned about our bankruptcy, new home prices decline, interest rates increase or there is a further downturn in the economy.

        Our backlog numbers reflect the number of homes for which we have entered into a sales contract with a customer but not yet delivered. Sales contracts for our Brightwater project in Huntington Beach require a deposit equal to 3% of the sales price, plus additional amounts for options, and the deposit is generally refundable if customers are unable to close on the sale of their existing home, fail to qualify for financing or under certain other circumstances. Our bankruptcy is also of concern to potential homebuyers and the changing dynamics of the Chapter 11 Cases has resulted in, and may continue to result in cancellations. Declines in home prices, interest rate increases or further downturn in local or regional economies or the national economy, could also cause homebuyers to terminate their existing sales contracts. Such a result could have an adverse effect on our homebuilding business, financial condition, and our results of operations.

Tax law changes could make home ownership more expensive or less attractive.

        Significant expenses of owning a home, including mortgage interest expense and real estate taxes, generally are deductible expenses for the purpose of calculating an individual's federal, and in some cases state, taxable income. If the government were to make changes to income tax laws that eliminate or substantially reduce these income tax deductions, the after-tax cost of owning a new home would increase substantially. This could adversely impact demand for, and/or sales prices of, new homes.

Mortgage defaults by homebuyers who financed homes using non-traditional financing products are increasing the number of homes available for resale.

        During the period of high demand in the homebuilding industry, many homebuyers financed their purchases using non-traditional adjustable rate or interest-only mortgages or other mortgages, including sub-prime mortgages that involved at least during initial years, monthly payments that were significantly lower than those required by conventional fixed rate mortgages. As a result, new homes became more affordable. However, as monthly payments for these homes increase either as a result of increasing adjustable interest rates or as a result of principal payments coming due, some of these homebuyers have defaulted on their payments and had their homes foreclosed, which has increased the inventory of homes available for resale. This is likely to continue. Foreclosure sales and other distress sales may result in further declines in market prices for homes. In an environment of declining prices, many homebuyers may delay purchases of homes in anticipation of lower prices in the future. In addition, as lenders perceive deterioration in credit quality among homebuyers, lenders have been eliminating some of the available non-traditional and sub-prime financing products and increasing the qualifications needed for mortgages or adjusting their terms to address increased credit risk. In general, to the extent mortgage rates increase or lenders make it more difficult for prospective buyers to finance home purchases, it becomes more difficult or costly for customers to purchase our homes, which has an adverse effect on our sales volume.

Competition for homebuyers, labor and materials could reduce our deliveries or decrease our profitability.

        The homebuilding industry is highly competitive for skilled labor, materials and suitable land, as well as homebuyers. We compete in each of our markets with numerous national, regional and local homebuilders many of whom have substantially greater resources than we do. In addition, smaller

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regional and local builders can have an advantage in local markets because of long-standing relationships they may have with local labor or land sellers. This competition with other homebuilders could reduce the number of homes we deliver, or cause us to accept reduced margins in order to maintain sales volume.

        We also compete with resales of existing used or foreclosed homes, housing speculators and available rental housing. Increased competitive conditions in the residential resale or rental market in the regions where we operate could decrease demand for new homes and increase cancellations of sales contracts in backlog.

Slow or no growth initiatives have been or may be adopted in regions where we operate, which could adversely affect our ability to build or timely build in these areas.

        Some municipalities where we operate have approved, and others where we operate may approve, various slow growth or no growth homebuilding initiatives and other ballot measures that could negatively impact the availability of land and building opportunities within those localities. Approval of slow growth, no growth or similar initiatives (including the effect of these initiatives on existing entitlements and zoning) could adversely affect our ability to build or timely build and sell homes in the affected markets and or create additional administrative and regulatory requirements and costs, which, in turn, could have an adverse effect on our future revenues and earnings.

We may not be able to acquire land suitable for residential homebuilding at reasonable prices, which could increase our costs and reduce our revenues, earnings and margins.

        The availability of finished and partially developed lots and undeveloped land for purchase that meet our internal criteria depends on a number of factors outside our control, including land availability in general, competition with other homebuilders and land buyers for desirable property, inflation in land prices, and zoning, allowable housing density and other regulatory requirements. Our long-term ability to build homes depends upon our acquiring land suitable for residential building at reasonable prices in locations where we want to build. As competition for suitable land increases, and as available land is developed, the cost of acquiring suitable remaining land could rise, and the availability of suitable land at acceptable prices may decline. Any land shortages or any decrease in the supply of suitable land at reasonable prices could limit our ability to develop new communities or result in increased land costs. We may not be able to pass through to our customers any increased land costs, which could adversely impact our revenues, earnings and margins.

We are subject to substantial legal and regulatory requirements regarding the development of land, the homebuilding process and protection of the environment, and compliance with federal, state and local regulations related to our business could have substantial costs both in time and money, and some regulations could prohibit or restrict some homebuilding projects.

        Our homebuilding business is heavily regulated and subject to increasing local, state and federal statutes, ordinances, rules and regulations concerning zoning, resource protection, other environmental impacts, building design, construction and similar matters. These regulations often provide broad discretion to governmental authorities that regulate these matters, which can result in unanticipated delays or increases in the cost of a specified project or a number of projects in particular markets. We may also experience periodic delays in homebuilding projects due to building moratoria in any of the areas in which we operate.

        Our business is conducted in California, which is one of the most highly regulated and litigious states in the country. Therefore, our potential exposure to losses and expenses due to new laws, regulations or litigation may be greater than other homebuilders with a less significant California presence.

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        We are subject to extensive and complex laws and regulations that affect the land development and homebuilding process, including laws and regulations related to zoning, permitted land uses, levels of density, building design, elevation of properties, water and waste disposal and use of open spaces. In addition, we are subject to laws and regulations related to workers' health and safety. We generally are required to obtain permits, entitlements and approvals from local authorities to commence and complete residential development or home construction. Such permits, entitlements and approvals may, from time-to-time, be opposed or challenged by local governments, neighboring property owners or other interested parties, adding delays, costs and risks of non-approval to the process. Our obligation to comply with the laws and regulations under which we operate, and our obligation to ensure that our employees, subcontractors and other agents comply with these laws and regulations, could result in delays in construction and land development, cause us to incur substantial costs and prohibit or restrict land development and homebuilding activity in certain areas in which we operate.

        We are also subject to a variety of local, state and federal statutes, ordinances, rules and regulations concerning the environment. These laws and regulations may cause delays in construction and delivery of new homes, may cause us to incur substantial compliance and other costs, and can prohibit or severely restrict homebuilding activity in certain environmentally sensitive regions or areas. In addition, environmental laws may impose liability for the costs of removal or remediation of hazardous or toxic substances whether or not the developer or owner of the property knew of, or was responsible for, the presence of those substances. The presence of those substances on our properties may prevent us from selling our homes and we may also be liable, under applicable laws and regulations or lawsuits brought by private parties, for hazardous or toxic substances on properties and lots that we have sold in the past.

Changing market conditions may adversely impact our ability to sell homes at expected prices, which could reduce our margins.

        There is often a significant amount of time between when we initially acquire land and when we begin to sell homes on that land. The market value of a proposed home can vary significantly during this time due to changing market conditions. In the past, we have benefited from increases in the value of homes over time, but as market conditions reverse, we have had to sell homes at lower prices than we anticipated. We have had to record write-downs of our home inventories and land holdings, and may need to record additional write-downs if market values continue to decline.

Home prices and sales activity in the particular markets and regions in which we do business impact our results of operations because our business is concentrated in these markets.

        Home prices and sales activity in our key markets have declined from time to time for market-specific reasons, including economic contraction due to, among other things, the failure or decline of key industries and employers. If home prices or sales activity decline in one or more of the key markets in which we operate, our costs may not decline at all or at the same rate and, as a result, our overall results of operations may be adversely impacted.

Product liability litigation and warranty claims that arise in the ordinary course of business may be costly, which could adversely affect our business.

        As a homebuilder, we are subject to construction defect and home warranty claims arising in the ordinary course of business. These claims are common in the homebuilding industry and can be costly. In addition, the costs of insuring against construction defect and product liability claims are high, and the amount of coverage offered by insurance companies is currently limited. There can be no assurance that this coverage will not be further restricted and become more costly. If we are not able to obtain adequate insurance against these claims, we may experience losses that could impact our financial results.

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Our controlling stockholders are able to exercise significant influence over us.

        Four (4) of our stockholders have approximately 46% of the outstanding shares of our common stock. Their combined stock ownership enables them to exert significant control over us, including power to control the election of our Board of Directors and to approve matters presented to our stockholders. This concentration of ownership may also make some transactions, including mergers or other changes in control, more difficult or impossible without their support. Also, because of their combined voting power, circumstances may occur in which their interests could be in conflict with the interests of other stockholders.

Our stock price is volatile and could further decline.

        The securities markets in general and our common stock in particular have experienced significant price and volume volatility over the past two years. The market price and volume of our common stock may continue to experience significant fluctuations due not only to general stock market conditions but also to a change in sentiment in the market regarding our industry, operations or business prospects. In addition to the other risk factors discussed in this section, the price and volume volatility of our common stock may be affected by:

•

events associated with the Chapter 11 Cases;

•

being delisted from trading on the Nasdaq Stock Market;

•

operating results that vary from the expectations of securities analysts and investors;

•

factors influencing home purchases, such as availability of home mortgage loans and interest rates, credit criteria applicable to prospective borrowers, ability to sell existing residences, and homebuyer sentiment in general;

•

the operating and securities price performance of companies that investors consider comparable to us;

•

announcements of strategic developments, acquisitions and other material events by us or our competitors; and

•

changes in global financial markets and global economies and general market conditions, such as interest rates, commodity and equity prices and the value of financial assets.

        To the extent that the price of our common stock remains low or declines, our ability to raise funds through the issuance of equity or otherwise use our common stock as consideration will be reduced. This, in turn, may adversely impact our ability to reduce our financial leverage, as measured by the ratio of debt to total capital. Continued high levels of leverage or further increases may make it more difficult for us to access additional capital. These factors may limit our ability to implement future operating and growth plans.

We could be hurt by the loss of key management personnel.

        Our future success depends, to a significant degree, on the efforts of our senior management. Our operations could be adversely affected if key members of senior management cease to be active in our company.

An earthquake or other natural disaster, terrorist act or nuclear accident could adversely affect our business.

        Our Brightwater project, which commenced sales in August 2007 and represents substantially all of our real estate assets as of December 31, 2009, is located in a high risk geographical area for earthquakes. In addition, all of our other real estate assets are in southern California and could be directly or indirectly impacted by the event of an earthquake. Our real estate assets are also located in

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areas that are subject to the risks of wildfires, floods and other natural disasters; and they are also in proximity to urban and coastal areas which have, in recent years, been high risk geographical areas for terrorism and threats of terrorism. Finally, our real estate assets are located within 40 miles of the San Onofre nuclear power facility. Future earthquakes or other natural disasters, acts of terrorism or nuclear accidents could result in the destruction or loss of our real estate assets or adversely impact the demand for our homes and could, thereafter, materially impact the availability or cost of any insurance we might obtain to protect against these events. Any earthquake or other natural disaster, terrorist attack, or nuclear accident, whether or not insured, could have a material adverse effect on our financial performance, the market value of our common stock and our ability to pay dividends.

Quarterly results may fluctuate and may not be indicative of future quarterly performance.

        Our quarterly operating results could fluctuate; therefore, you should not rely on past quarterly results to be indicative of our performance in future quarters. Factors that could cause quarterly operating results to fluctuate include, among others, the risk factors in this Annual Report and those set forth in our Quarterly Reports on Form 10-Q filed during 2009.

Our net operating loss carryforwards could be substantially limited if we experience an ownership change as defined in the Internal Revenue Code.

        We currently have a substantial amount of net operating loss carryforwards and, based on recent impairments and our current financial performance, we may generate net operating loss carryforwards for the year ending December 31, 2009, and possibly future years.

        Section 382 of the Internal Revenue Code contains rules that limit the ability of a company that undergoes an ownership change, which is generally any change in ownership of more than 50% of its stock over a three-year period, to utilize its net operating loss carryforwards and certain built in losses recognized in years after the ownership change. These rules generally operate by focusing on ownership changes among stockholders owning directly or indirectly 5% or more of the stock of a company or any change in ownership arising from a new issuance of stock by a company.

        If we undergo an ownership change for purposes of Section 382 as a result of future transactions involving our common stock, including purchases or sales of stock between 5% stockholders, our ability to use our net operating loss carryforwards and recognize certain built in gains would be subject to the limitations of Section 382. Depending on the resulting limitation, a significant portion of our net operating loss carryforwards could expire before we would be able to use them. Our inability to utilize our net operating loss carryforwards could have a negative impact on our financial position and results of operations.

If any taxing authorities are successful in asserting tax positions that are contrary to our positions, our income tax provision and other tax reserves may be insufficient.

        In order to determine our provision for income taxes and for our reserves for federal, state, local and other taxes we must use significant judgment and there may be matters for which the ultimate tax outcome is uncertain. Therefore, no assurance can be given that the final tax authority review will not be materially different than that which is reflected in our income tax provision and other tax reserves. Any adverse differences could have a material adverse effect on our income tax provision or benefits, or other tax reserves, in the period in which such determination is made and, consequently, on our net income for such period. To provide for potential tax exposures, we maintain reserves for tax contingencies based on reasonable estimates of our potential exposure with respect to the tax liabilities that may result from such audits. However, if the reserves are insufficient upon completion of any audit process, there could be an adverse impact on our financial position and results of operations.

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Changes in accounting principles, interpretations and practices may affect our reported revenues, earnings and results of operations.

        Generally accepted accounting principles and accounting pronouncements, implementation guidelines, interpretations and practices for certain aspects of our business are complex and may involve subjective judgments, such as cost of sales, inventory valuations and income taxes. Changes in these areas could significantly affect our reported costs, earnings and operating results.

Future terrorist attacks against the United States or increased domestic or international instability could have an adverse effect on our operations.

        Adverse developments in the war on terrorism, future terrorist attacks against the United States, or increased domestic or international instability could adversely affect our business.

Insurance coverages and terms and conditions.

        We negotiate our insurance contracts annually for property, casualty, workers compensation, general liability, health insurance, and directors and officers liability coverage. Due to conditions within these insurance markets and other factors beyond our control, future coverage limits, terms and conditions and the amount of the related premiums could have a negative impact on our operating results. While we continually measure the risk/reward of policy limits and coverage, the lack of coverage in certain circumstances could result in potential uninsured losses.

Errors in estimates and judgments that affect decisions about how we operate and on the reported amounts of assets, liabilities, revenues and expenses could have a material impact on us.

        In the ordinary course of doing business, we must make estimates and judgments that affect decisions about 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 the recognition of income and expenses; impairment of assets; estimates of future improvement and amenity costs; estimates of sales levels and sales prices; capitalization of costs to inventory; provisions for litigation, insurance and warranty costs; cost of complying with government regulations; 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 upon the information then currently available. Actual results may differ from these estimates, assumptions and conditions.

Our failure to achieve and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 could have a material adverse effect on our business and the price of our common stock.

        Section 404 of the Sarbanes-Oxley Act of 2002 requires our management to assess the effectiveness of our internal control over financial reporting at the end of each fiscal year, including a statement as to whether or not internal control over financial reporting is effective. Any failure to achieve and maintain effective internal controls over financial reporting and otherwise comply with the requirements of Section 404 could have a material adverse effect on our business and the price of our common stock. Such noncompliance could result in an adverse reaction in the financial marketplace due to a loss of investor confidence in the reliability of our financial statements. In addition, perceptions of our business among customers, suppliers, rating agencies, lenders, investors, securities analysts, and others could be adversely affected.

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Item 1B.    Unresolved Staff Comments

        None.

Item 2.    Properties

        We lease our principal executive offices, which are located in Irvine, California. We believe that our properties are generally well maintained, in good condition and adequate for their present and proposed uses. The inability to renew any short-term real property lease would not be expected to have a material adverse effect on our results of operations. We own land, lots, and homes that are held as inventory in the ordinary course of our homebuilding business. These properties are discussed above in Item 1—Business.

Item 3.    Legal Proceedings

Chapter 11 Cases

        On October 27, 2009, we and certain of our direct and indirect wholly-owned subsidiaries filed voluntary petitions for relief under chapter 11 of title 11 of the United States Code in the United States Bankruptcy Court for the Central District of California. The Chapter 11 Cases are being jointly administered under the caption In re California Coastal Communities, Inc., Case No. 09-21712-TA; and they are described in greater detail in Item 1—Business—Status of the Chapter 11 Cases set forth above in this Annual Report.

Other Litigation

        We are involved in litigation arising in the ordinary course of business, none of which is expected to have a material adverse effect on our financial position or results of operations and we are subject to extensive and complex regulations that affect the development and homebuilding processes, including zoning, density, building standards, mortgage financing and product liability. These regulations often provide broad discretion to the administering governmental authorities. This can delay or increase the cost of development or homebuilding.

California Department of Toxic Substances Control

        In October 2006, the California Department of Toxic Substances Control ("DTSC") filed a civil complaint against the Company's Hearthside Residential Corp. subsidiary ("HRC") in the Federal District Court for the Southern Division of the Central District of California The DTSC's 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. HRC's 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 attorney's 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. Our subsidiary is vigorously defending itself in this matter.

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Therefore, we have not accrued for any of DTSC's approximately $1.0 million of claims related to these residential properties.

        Prior to the commencement of trial that was scheduled for December 2, 2008, the District Court ruled that HRC can be held liable as a "current owner" of the site under applicable law. HRC applied to have that ruling certified for appeal. In March 2009, the District Court granted permission to hear HRC's appeal and the appellate process commenced. The Company is currently awaiting a hearing date for oral arguments to be heard. HRC currently expects that it could take two to four months to complete the appellate process. There can be no assurance that HRC will receive a favorable ruling that it is not deemed to be a current owner of the site. Once the appellate process is complete, the parties will return to the District Court within 30 to 60 days to commence a trial.

        Our consolidated balance sheet includes reserves for contingent indemnity obligations for certain businesses disposed of by our former affiliated companies whose business was unrelated to our current homebuilding operations.

Item 4.    (Removed and Reserved).

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PART II

Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

        The following tables set forth information with respect to bid quotations for our common stock for the periods indicated as reported on the Nasdaq Global Market. These quotations are interdealer prices without retail markup, markdown or commission and may not necessarily represent actual transactions.

	High		Low
2009
First Quarter	$	1.60	$	0.40
Second Quarter	$	2.00	$	0.66
Third Quarter	$	2.07	$	1.10
Fourth Quarter	$	1.68	$	0.61
2008
First Quarter	$	8.08	$	4.17
Second Quarter	$	6.85	$	3.51
Third Quarter	$	3.93	$	1.07
Fourth Quarter	$	2.50	$	0.39

        The number of beneficial holders of our common stock as of March 29, 2010 was approximately 1,700.

        On September 28, 2006, we paid a special dividend of $12.50 per share to holders of record on September 25, 2006. Since that date we have not and we do not currently intend to pay regular cash dividends on our common stock.

Equity Compensation Plan

        The following table provides information as of December 31, 2009 with respect to the shares of common stock that may be issued under our equity compensation plan.

Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)		Weighted-average exercise price of outstanding options, warrants and rights (b)		Number of securities remaining available for future issuance under equity compensation plans (excluding securities listed in column (a)) (c)
Equity compensation plans approved by security holders(1)		17,500	$	21.58		221,794
Equity compensation plans not approved by security holders		—		—		—
Total		17,500	$	21.58		221,794

(1)

Consists of options issued in accordance with the Director Fee Program of the Amended and Restated 1993 Stock Option/Stock Issuance Plan.

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Performance Graph

        The following graph illustrates the return during the past five years that would have been realized on December 31 of each year (assuming reinvestment of dividends) by an investor who invested $100 on December 31, 2004 in each of (i) our common stock, (ii) a peer group index ("Real Estate Index"), which consists of four real estate development and homebuilding companies, and (iii) the Morningstar US Market Index.

        Our peer group index includes the following companies: Beazer Homes, Brookfield Homes Corporation, Hovnanian Enterprises, Meritage Homes Corporation, Standard Pacific Corporation, and Tejon Ranch Company.

COMPARE 5-YEAR CUMULATIVE TOTAL RETURN
AMONG CALIFORNIA COASTAL COMMUNITIES, INC.,
MORNINGSTAR US MARKET INDEX AND PEER GROUP INDEX

ASSUMES $100 INVESTED ON DECEMBER 31, 2004
ASSUMES DIVIDEND REINVESTED FISCAL YEAR ENDING DECEMBER 31, 2009

	2004		2005		2006		2007		2008		2009
California Coastal Communities, Inc.		100.00		163.12		143.41		39.31		3.34		8.69
Peer Group Index (including Beazer Homes)		100.00		119.19		88.75		24.57		11.46		19.30
Peer Group Index (excluding Beazer Homes)		100.00		111.82		86.56		26.57		13.23		21.37
Morningstar US Market Index		100.00		106.52		123.24		130.53		82.19		105.58

        The above graph is based upon common stock and index prices calculated as of year-end for each of the last five calendar years. The stock price performance of our common stock depicted in the graph above represents past performance only and is not necessarily indicative of future performance.

Item 6.    Selected Financial Data

        Our Selected Financial Data is set forth on page 57 of this Annual Report.

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Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations

        Management's Discussion and Analysis of Financial Condition and Results of Operations is set forth beginning on page 58 of this Annual Report.

Item 7A.    Quantitative and Qualitative Disclosures About Market Risk

        We utilize variable rate debt financing for acquisition, development and construction of homes. We are exposed to market risks related to fluctuations in interest rates on our outstanding variable rate debt. As a result of our default in paying $1.7 million of principal due on the revolving loan in 2009, effective October 1, 2009, interest is incurred on the Revolving and Term Loans at the default rate stated in the loans. However, under the terms of the bankruptcy court's interim orders for use of cash collateral, we continue to pay interest at the non-default rates of 3.50% and 4.25% on the Revolving Loan and the Term Loan, respectively, and were current on such payments as of December 31, 2009. We are working with our lenders to restructure our debt obligations under the Revolving and Term Loans through the Chapter 11 Cases which may result in higher interest rates for both loans and would affect our earnings and cash flows. Holding our variable rate debt balance constant as of December 31, 2009, 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 did not utilize swaps, forward or option contracts on interest rates, or other types of derivative financial instruments as of or during the year ended December 31, 2009. We do not enter into or hold derivatives for trading or speculative purposes.

        You should be aware that many of the statements contained in this section are forward looking and should be read in conjunction with our disclosures under the heading "Forward-Looking Statements."

Item 8.    Financial Statements and Supplementary Data

        Our Consolidated Financial Statements are listed in Item 15 of Part IV below and are submitted as a separate section of this Annual Report, beginning on page F-2.

Item 9.    Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

        None.

Item 9A.    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 SEC's 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

39

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.

Management's Annual Report on Internal Control Over Financial Reporting

        Our management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in the Securities Exchange Act Rule 13a-15(f). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on our financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

        Under the supervision and with the participation of our management, including our principal executive officer and our principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation under the framework in Internal Control—Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2009.

        This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management's report in this annual report.

/s/ RAYMOND J. PACINI

Raymond J. Pacini
President and Chief Executive Officer

/s/ SANDRA G. SCIUTTO

Sandra G. Sciutto
Senior Vice President and Chief Financial Officer

Changes in Internal Controls

        There have been no changes in our internal control over financial reporting during the three months ended December 31, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B.    Other Information

        None.

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PART III

Item 10.    Directors, Executive Officers and Corporate Governance

Biographical Information About Our Directors

        Set forth below is a description of the business experience of our directors and the names of other publicly-held companies for which they currently serve as a director or has served as a director during the past five years. In addition to the information presented below regarding each nominee's or director's specific experience, qualifications, attributes and skills that led our Board of Directors to the conclusions that the directors should serve at this time, the Board also believes that all of our directors are individuals of substantial accomplishment with demonstrated leadership capabilities. Each of our directors also has the following personal characteristics: integrity, commitment, independence of thought, judgment essential for effective decision making and the ability and willingness to dedicate the necessary time, energy and attention to prepare for, attend and participate in meetings of the Board and its committees.

        Geoffrey W. Arens, 45, has been a director since April 2004. Mr. Arens is a Managing Director of ING Capital LLC (investment management/proprietary trading) which is a subsidiary of the ING Group, an Amsterdam-based banking, investment banking and insurance institution. Since prior to 1998 until May 1998, Mr. Arens was a Vice President of ING Barings Securities Limited. In addition to his past performance as one of our directors, Mr. Arens's qualifications to serve on our Board include his experience discussed above especially, among other things, his service at ING.

        Phillip R. Burnaman II, 50, has been a director since September 1997 and has been our Chairman of the Board since October 2008. Mr. Burnaman was Head of Structured Products for NewStar Financial Inc., a specialty finance company focused on non-investment grade credit opportunities from 2004 until December 2007. Mr. Burnaman was Senior Managing Director of ING Barings Services Limited (investment management/proprietary trading) which is a subsidiary of the ING Group, an Amsterdam-based banking, investment banking and insurance institution from February 2001 until March 31, 2004. Mr. Burnaman was Managing Director and global head of the Strategic Trading Platform of ING Barings from prior to 1998 until February 2001. In addition to his past performance as one of our directors, Mr. Burnaman's qualifications to serve on our Board include his experience discussed above especially, among other things, his service at NewStar and ING.

        Marti P. Murray, 50, has been a director since November 2007. Ms. Murray was Managing Director and Portfolio Manager at Babson Capital Management LLC, a registered investment advisor from April 2008 to September 2009. In April 2008, Ms. Murray sold the distressed debt investment management business of Murray Capital Management, Inc., a firm she founded in April 1995, to Babson Capital. Prior to founding Murray Capital, Ms. Murray was a Senior Managing Director and Portfolio Manager at Furman Selz Incorporated, and a Senior Vice President and Investment Analyst at Oppenheimer & Co. In addition to her past performance as one of our directors, Ms. Murray's qualifications to serve on our Board include her experience discussed above especially, among other things, her service at Murray Capital and Babson Capital.

        Raymond J. Pacini, 54, has been a director and our President and Chief Executive Officer since May 1998. Prior to then he was our Executive Vice President, Chief Financial Officer, Secretary and Treasurer. Mr. Pacini also serves on the Board of Directors of Cadiz, Inc., a publicly traded company that manages water and real estate resources in California, and he is the chairman of that company's audit committee. Mr. Pacini's qualifications to serve on our Board are demonstrated by his long-standing service performance record as both a director and executive officer of our company.

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Biographical Information About Our Executive Officers and Key Employees

Executive Officers

        Raymond J. Pacini, 54, has been a director and our President and Chief Executive Officer since May 1998. Prior to then he was our Executive Vice President, Chief Financial Officer, Secretary and Treasurer. Mr. Pacini also serves on the Board of Directors of Cadiz, Inc., a publicly traded company that manages water and real estate resources in California, and he is the chairman of that company's audit committee.

        Sandra G. Sciutto, 50, has served as our Senior Vice President, Chief Financial Officer, Treasurer and Corporate Secretary since 1998. Ms. Sciutto is responsible for all of our financial reporting, accounting, treasury, human resources and corporate administration.

Key Employees

        Michael J. Rafferty, 55, has been President and Chief Operating Officer of our homebuilding subsidiary, Hearthside Homes, Inc., since 1995. Mr. Rafferty is responsible for all of Hearthside's homebuilding operations in Southern California.

        John W. Marshall, 59, has been Senior Vice President of Hearthside since 1996. Mr. Marshall is responsible for arranging bank financing for all of Hearthside's homebuilding projects in Southern California, financial planning and analysis of project performance and due diligence for all land acquisitions.

        Ed Mountford, 54, has been a Senior Vice President of Hearthside since May 1998. Mr. Mountford is responsible for all of Hearthside's land entitlement activities in Southern California. Mr. Mountford was also responsible for Hearthside's entitlement activities for a 1,500 unit residential development called SouthShore, which is adjacent to the City of Oxnard in Ventura County.

Audit Committee

        The Audit Committee oversees the preparation of a report for inclusion in our annual proxy statement and is charged with the duties and responsibilities listed in its charter. The Audit Committee is a separately designated standing audit committee as defined in Section 3(a)(58)(A) of the Securities Exchange Act of 1934.

        Our Audit Committee consists of Ms. Marti P. Murray and Messrs. Arens and Burnaman. Mr. Burnaman serves as Chairman of the Audit Committee and, as determined by the Board, he is independent and based upon his past employment experience as a chief executive officer or other senior officer with financial oversight responsibilities which results in the level of financial sophistication as set forth in the rules of The Nasdaq Stock Market LLC, Mr. Burnaman qualifies as the "audit committee financial expert" as defined in the rules of the Securities and Exchange Commission.

Section 16(a) Beneficial Ownership Reporting Compliance

        Section 16 of the Securities and Exchange Act of 1934, as amended, requires our directors and executive officers and persons who own more than 10% of our common stock to file various reports with the Securities and Exchange Commission and the National Association of Securities Dealers concerning their holdings of, and transactions in, our common stock. Copies of these filings must be furnished to us.

        Based solely on a review of the copies of such forms furnished to us and written representations from our executive officers and directors, we believe that there was compliance for the fiscal year

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ended December 31, 2009 with all Section 16(a) filing requirements applicable to our officers, directors and greater than 10% stockholders.

Code of Ethics and Business Conduct

        Our Board of Directors has adopted a Code of Ethics and Business Conduct applicable to all of our directors and employees, including our Chief Executive Officer, Chief Financial Officer, and any other principal executive, senior financial or principal accounting officer. A current version of the Code of Ethics and Business Conduct is available at our website: www.investors.californiacoastalcommunities.com/governance.cfm. We will disclose any amendment to the Code of Ethics and Business Conduct or waiver of or departure from a provision thereof by filing a Current Report on Form 8-K with the Securities and Exchange Commission within five business days of any such occurrence.

        Stockholders may request a free copy of the Code of Ethics and Business Conduct by writing to: California Coastal Communities, Inc., c/o Shareholder Services, 225 West Station Drive, Suite 545, Pittsburgh, PA 15219.

Item 11.    Executive Compensation

Compensation of Non-Employee Directors

        Our non-employee directors are entitled to receive cash compensation and compensation under the plans described below.

        Cash Compensation.    During 2009, non-employee directors were entitled to receive compensation of $40,000 per year provided that each non-employee director elected to receive 50% of such compensation as restricted stock under the Director Fee Program of the 1993 Stock Option/Stock Issuance Plan. Non-employee directors also receive $2,000 for each meeting of the Board of Directors that they attend in person and up to $1,000 per telephonic meeting. For 2010, the amounts are unchanged. Non-employee directors who are members of the Audit and Compensation Committees are entitled to receive $5,000 per year for membership in each of those committees and $1,000 for attendance at each committee meeting. Non-employee directors who are members of the Finance Committee are paid based on actual hours incurred with respect to Finance Committee matters, and during 2009 the Finance Committee member was paid $36,400. All directors are reimbursed for expenses incurred in attending Board and committee meetings. During 2009, the Chairman of the Audit Committee was entitled to receive $30,000 of restricted stock under the Director Fee Program of the 1993 Stock Option/Stock Issuance Plan, and such restricted stock vests 25% at the end of each quarter. Under our Deferred Compensation Plan for Non-Employee Directors, a non-employee director may elect, generally prior to the commencement of any calendar year, to have all or any portion of the director's compensation for the calendar year credited to a deferred compensation account. Amounts credited to the director's account will accrue interest based upon the average quoted rate for ten-year U.S. Treasury Notes. Deferred amounts will be paid in a lump sum or in installments commencing on the first business day of the calendar year following the year in which the director ceases to serve on the Board, or of a later calendar year specified by the director.

        Amended and Restated 1993 Stock Option/Stock Issuance Plan.    Our Amended and Restated 1993 Stock Option/Stock Issuance Plan contains two separate equity incentive programs in which members of the Board of Directors may be eligible to participate.

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DIRECTOR COMPENSATION
For Fiscal Year Ended December 31, 2009

Name of Director	Fees Earned or Paid in Cash ($)		Stock Award ($)			Option Awards ($)		Non-Equity Incentive Plan Compensation ($)		Change in Pension Value and Nonqualified Deferred Compensation Earnings ($)		All Other Compensation ($)		Total ($)
Geoffrey W. Arens		34,500		20,000	(1)		-0-		-0-		-0-		-0-		54,500
Phillip R. Burnaman II		30,000		30,000	(2)		-0-		-0-		-0-		36,400		96,400
Marti P. Murray		34,500		20,000	(3)		-0-		-0-		-0-		-0-		54,500

(1)

Includes 35,714 restricted shares issued on January 2, 2009 at a price of $0.56 per share under the Director Fee Program of the Amended and Restated 1993 Stock Option/Stock Issuance Plan at the election of Mr. Arens. The shares vested in 25% increments at the end of each quarter during 2009.

(2)

Includes 53,572 restricted shares issued on January 2, 2009 at a price of $0.56 per share under the Director Fee Program of the Amended and Restated 1993 Stock Option/Stock Issuance Plan at the election of Mr. Burnaman. The shares vested in 25% increments at the end of each quarter during 2009.

(3)

Includes 35,714 restricted shares issued on January 2, 2009 at a price of $0.56 per share under the Director Fee Program of the Amended and Restated 1993 Stock Option/Stock Issuance Plan at the election of Ms. Murray. The shares vested in 25% increments at the end of each quarter during 2009.

Compensation of Executive Officers and Key Employees

COMPENSATION COMMITTEE REPORT

        The Compensation Committee reviewed and discussed with management the Compensation Discussion and Analysis set forth below as required by Item 402(b) of Regulation S-K promulgated under the Securities Exchange Act of 1934. The Compensation Committee recommended to the Board of Directors, and the Board of Directors approved the inclusion of the Compensation Discussion and Analysis in this Annual Report.

Compensation Committee of the Board of Directors


Geoffrey W. Arens
Marti P. Murray

COMPENSATION DISCUSSION AND ANALYSIS

General Overview

        The Compensation Committee of our Board of Directors is responsible for our overall compensation philosophy and determining the annual salary, short-term and long-term cash and stock incentive compensation, and other compensation of the executive leadership team, including the executive officers and key employees named in the Summary Compensation Table set forth below. In connection with the Compensation Committee's responsibility of determining the compensation for our

44

Chief Executive Officer and approving the compensation for our other executive officers and key employees, its primary objectives are to:

•

retain high quality executives by providing total compensation opportunities with a combination of compensation elements which approximate competitive opportunities, and

•

align stockholder interests and executive compensation by providing meaningful rewards for performance that is deemed to have increased long-term shareholder value.

        The Compensation Committee generally meets after year-end in a special meeting, and from time to time at additional special meetings on an as-needed basis. While the Company's Chief Executive Officer has been invited to attend certain Committee meetings from time to time as deemed appropriate, the Compensation Committee generally meets in executive session without management. Compensation matters are also discussed at executive sessions of the full board, where both Compensation Committee members and other independent members of the Board of Directors are present without management.

        In determining compensation for a specific executive, the Compensation Committee considers many factors, including the nature of the executive's job, the executive's job performance compared to goals and objectives established for the executive at the beginning of the year, the experience level of the executive in his or her current position, the compensation levels of competitive jobs, and our financial performance. For executive officers other than the Chief Executive Officer, the Compensation Committee also considers the recommendations made by our Chief Executive Officer. The Compensation Committee frequently asks for recommendations, input and support from our Chief Executive Officer, particularly regarding compensation and benefit program design and implementation, employee feedback, and compliance and disclosure requirements. At the Compensation Committee's request, the Chief Executive Officer reviews and discusses the performance and compensation of our other officers and employees and makes recommendations to the Compensation Committee as to their annual base salaries, annual incentives and long-term incentives. Our management is responsible for implementing our compensation and benefit programs under the Compensation Committee's oversight.

        We seek to provide compensation opportunities that are competitive in the aggregate as well as in the mix of elements. The compensation program is designed to provide the proper balance of fixed versus variable and cash versus equity compensation in order to align both short and long-term interests with overall business objectives. Actual earned compensation may increase when performance is outstanding relative to individual and/or our goals. To the extent that performance goals are not achieved, compensation may be negatively impacted.

Total Compensation

        The overall objectives of our compensation program are to retain the best possible executive talent, to motivate these executives to achieve the goals inherent in our business strategy, to maximize the link between executive and stockholder interests through an equity based plan and to recognize individual contributions as well as overall business results.

        The key elements of our compensation program consist of fixed compensation in the form of base salary, and variable compensation in the forms of restricted stock grants, stock options, and annual incentive compensation. An executive officer's annual base salary represents the fixed component of their total compensation; however, variable compensation is intended to comprise a substantial portion of an executive's total compensation. In addition, while the elements of compensation described below are considered separately, the Compensation Committee takes into account the full compensation package afforded to the individual, including any pension benefits, insurance and other benefits, as well as the programs described below.

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        In determining the principal components of executive compensation, the Compensation Committee considers the following factors: (1) the overall competitive environment in executive compensation needed to retain and motivate talented and experienced senior management; (2) our performance, both year over year and in comparison to other companies within the real estate development and homebuilding industries; (3) comparative compensation studies; and (4) our historical compensation levels.

Allocation Among Components of Compensation

        The compensation philosophy adopted by the Compensation Committee recognizes that distinctions in individual compensation levels are based on multiple factors, including (1) current level of contributions relative to peers; (2) expected future contributions to our performance; (3) past contributions to our performance; and (4) comparison to market value. The Compensation Committee also reviews the compensation levels for peer-level positions of other real estate development and homebuilding companies.

        The Compensation Committee tailors each compensation package to reflect the executive's role in our performance and relative position within the company. We believe that an executive who is highly influential in our performance should be compensated primarily based on performance. Since our Chief Executive Officer's incentive compensation is primarily equity-based, his bonus has historically been a smaller portion of his total cash compensation. Our homebuilding executives' incentive compensation is primarily tied to a formula based on the profits of our homebuilding subsidiary, and therefore their target bonus is intended to represent a greater portion of their total cash compensation.

Components of Executive Compensation

        Base Salaries.    Base salaries for executive officers are determined by evaluating the responsibilities of the position held and the experience of the individual, and by reference to the competitive marketplace for executive talent including, where appropriate, a comparison to base salaries for comparable positions at other companies, and to historical levels of salary paid by us and our predecessors. Salary adjustments are based on a periodic evaluation of our performance and of each executive officer and key employee, and also take into account new responsibilities as well as changes in the competitive marketplace. The Compensation Committee has not made any increases in executive officer or key employee base salary levels during 2008 or 2009.

        Annual Incentive Compensation Awards.    The variable compensation payable annually to the Chief Financial Officer and the Senior Vice President, Land Development is intended to consist principally of annual incentive compensation awards, based on various individual performance objectives established by the Chief Executive Officer and the Compensation Committee. Other than Ms. Sciutto's $90,000 incentive compensation award in 2008, no other awards were granted during 2008. For 2009, no incentive compensation awards have been granted due to the ongoing Chapter 11 Cases.

        Other Incentive Compensation.    Grants of restricted stock and stock options are designed to align the interests of the executive with those of the stockholders and provide each individual with a significant incentive to manage from the perspective of an owner with an equity stake in the business. The number of shares subject to each option grant is based upon the executive's tenure, level of responsibility and relative position. The Compensation Committee has established certain general guidelines in making option grants to the executives in an attempt to target a fixed number of option shares based upon the individual's position and their existing holdings of options. However, we do not adhere strictly to these guidelines and will vary the size of the option grant made to each executive officer or key employee as circumstances warrant. No stock options were granted during 2008 or 2009.

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        Discretionary Bonuses.    The Compensation Committee evaluates whether to grant a discretionary bonus to our Chief Executive Officer based on the performance of both the Company and our Chief Executive Officer, while considering the objective of tying most of our Chief Executive Officer's variable compensation to our stock performance through the granting of restricted stock and options described below. In recognition of the achievements of our Chief Executive Officer and Chief Financial Officer in successfully completing amendments to our $210 million senior credit agreements in September 2008 and our $25 million sale and leaseback transaction in December 2008, the Compensation Committee awarded them bonuses of $150,000 and $90,000, respectively for 2008. Such bonuses were payable in four equal installments at the end of each quarter in 2009 provided that such executive remains an employee of the Company; however, due to the ongoing Chapter 11 Cases the fourth quarter installments have not yet been paid.

        Retirement Plans.    The Company has a noncontributory defined benefit retirement plan which covered substantially all of our employees prior to September 30, 1993 who had completed one year of continuous employment. The benefit accrual for all participants was terminated on December 31, 1993. Due to the age of this plan, only one of our current executives is covered by the plan.

        We also provide a 401(k) plan to all employees pursuant to which participants may contribute a portion of their compensation to their respective retirement accounts, in an amount not to exceed the maximum allowed under Section 401(k) of the Internal Revenue Code. We match a portion of contributions made by non-highly compensated employees. Our executives participate in the 401(k) plan on the same terms as other employees.

        Severance and Change of Control Benefits.    The employment agreements of Messrs. Rafferty, Marshall, and Mountford expired on December 31, 2008, and the employment contracts of Mr. Pacini and Ms. Sciutto expired on April 30, 2009. As at-will employees, our executive officers and key employees are not entitled to any further employment contract severance benefits; however, they will be entitled to receive severance benefits in accordance with our human resource policies, which provide for payment of one week of base salary for every full year of completed employment.

        Perquisites and Other Benefits.    The primary perquisite available to executives is a nominal auto allowance. Our executives also participate in the Company's other benefit plans on the same terms as other employees. These plans include medical and dental insurance, life insurance, and short- and long-term disability insurance.

Determining the Amount of Each Element of Compensation

        The Compensation Committee believes that compensation decisions are complex and require a deliberate review of Company performance and industry compensation levels. The Compensation Committee does not believe that it is appropriate to establish compensation levels based only on market or industry practices. The Compensation Committee reviews the performance of each executive officer and key employee, including the Chief Executive Officer, on an annual basis and is responsible for reviewing the achievement of individual goals and objectives, evaluating performance, and setting compensation based on this evaluation. The Compensation Committee assesses the performance of the executive officers and key employees in addition to the financial results we have achieved against annual objectives. Among other things, in particular with respect to the Chief Executive Officer, the Compensation Committee evaluates strategic vision and leadership, our business and operational results, and the ability to make long-term decisions that create competitive advantage and position us for the future.

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Use of Market Data

        The Compensation Committee considers survey and peer group data as one factor in setting executive compensation. This information gives the Compensation Committee a general sense of whether our executive compensation is reasonable and competitive relative to the compensation paid to executives with similar responsibilities at companies that we consider to be similar to us based on revenues or nature of operations. Although comparisons to compensation levels at other companies are helpful in assessing the overall competitiveness of our compensation program to retain executive talent, the Compensation Committee does not target compensation at any specified level within a general industry or peer group.

Internal Revenue Code Section 162(m)

        The Compensation Committee has considered the potential impact of Section 162(m) of the Internal Revenue Code adopted under the Federal Revenue Reconciliation Act of 1993. This section precludes a public corporation from taking a tax deduction for individual compensation in excess of $1 million for its chief executive officer or any of its four other highest-paid officers. This section also provides for certain exemptions to this limitation, specifically compensation that is performance based within the meaning of Section 162(m). It is our policy to qualify, to the extent reasonable, compensation paid to executives for deductibility under Section 162(m). However, the Compensation Committee may from time to time approve compensation that is not deductible under this Section.

Grant Dates for Stock Option Awards

        Our policy is that stock option grants will only be made on dates when the market has been provided with sufficient time to absorb any material non-public information that may have been disclosed prior to the option grant date. This practice applies to executives, as well as to employees in general. The exercise price for our stock options is the closing price at the end of the trading day on which the option is granted.

        We do not plan to time, and have not timed, our release of material non-public information for the purpose of affecting the value of executive compensation. We do not have any programs, plans or practices of awarding stock options and setting the exercise price based on the stock's price on a date other than the actual grant date.

        Set forth below is information regarding compensation earned by or paid or awarded to Raymond J. Pacini, our Chief Executive Officer, the next two most highly compensated executive officers, and the two highest paid key employees whose total compensation exceeded $100,000, other than Mr. Pacini. The identification of such named executive officers and key employees is determined

48

based on the individual's total compensation for the year ended December 31, 2009, as reported below in the Summary Compensation Table:

SUMMARY COMPENSATION TABLE(1)

Name and Principal Position		Year		Salary ($)		Bonus ($)(2)		Total ($)
Raymond J. Pacini,			2009		359,600		-0-		359,600
	President and Chief Executive Officer		2008		359,600		150,000		509,600
			2007		359,600		-0-		359,600
Sandra G. Sciutto,			2009		212,600		-0-		212,600
	Senior Vice President and Chief Financial Officer		2008		212,600		90,000		302,600
			2007		212,600		90,000		302,600
Michael J. Rafferty,			2009		236,100		-0-		236,100
	President		2008		236,100		-0-		236,100
	Hearthside Homes, Inc.		2007		236,100		-0-		236,100
John W. Marshall,			2009		176,600		-0-		176,600
	Senior vice President, Finance		2008		176,600		-0-		176,600
	Hearthside Homes, Inc.		2007		176,600		-0-		176,600
Ed Mountford,			2009		197,100		-0-		197,100
	Senior Vice President, Land Development		2008		197,100		-0-		197,100
	Hearthside Homes, Inc.		2007		197,100		-0-		197,100

(1)

During the past three (3) fiscal years, none of our officers received any stock awards, stock options, non-equity incentive plan compensation, nonqualified deferred compensation earnings or any other form of compensation.

(2)

Includes amounts paid in the year following the end of the respective calendar year. The bonuses for 2008 were paid ratably at the end of each quarter in 2009, and payment of the last quarter's payments will not be made until the Chapter 11 Cases have ended. For 2009, no bonus compensation has been approved by the Board due to the ongoing Chapter 11 Cases.

        Under employment agreements in effect during 2008, all of our executive officers and key employees were entitled to receive their respective base salaries and Ms. Sciutto is entitled to receive incentive compensation upon the completion of certain performance targets. The employment agreements of Messrs. Rafferty, Mountford and Marshall expired on December 31, 2008 and the agreements with Ms. Sciutto and Mr. Pacini expired on April 30, 2009.

PENSION BENEFITS
For Fiscal Year Ended December 31, 2009

        The following table sets forth the accumulated benefit under our defined benefit retirement plan that was frozen in 1993, for Mr. Pacini who is the only plan participant listed in the Summary Compensation Table. The table also shows the number of years of credited service, computed as of December 31, 2009.

Name of Executive Officer	Plan Name	Number of Years Credited Service (#)		Present Value of Accumulated Benefit ($)		Payments During Last Fiscal Year ($)
Raymond J. Pacini, President and Chief Executive Officer	California Coastal Communities, Inc. Retirement Plan		7		144,000		-0-

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2009 STOCK OPTIONS AND STOCK AWARDS

        On December 31, 2009, no stock options or stock awards were held by any of the executives listed in the Summary Compensation Table above. During 2009, no stock options or stock awards were granted to any of the executives listed in the Summary Compensation Table above, and no stock options were exercised.

Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Principal Stockholders

        The following table shows stock ownership information, as of March 30, 2010, for each person known by us to be a beneficial holder of more than 5% of our common stock, the number of shares beneficially owned and the percentage so owned.

Title of Class	Name and Address of Beneficial Owner	Amount and Nature of Beneficial Ownership			Percent of Class
Common Stock	ING Capital LLC 1325 Avenue of the Americas, 10th Floor New York, NY 10019		1,755,683 shares(1	)		16.0	%
Common Stock	Eric D. Hovde 1826 Jefferson Place NW Washington, DC 20036		1,645,000 shares(2	)		15.0	%
Common Stock	Bank of America Corporation 100 North Tryon Street, Floor 25 Bank of America Corporate Center Charlotte, NC 28255		1,038,786 shares(3	)		9.4	%
Common Stock	Dimensional Fund Advisors Inc. 1299 Ocean Avenue Santa Monica, CA 90401		645,394 shares(4	)		5.9	%

(1)

Based on ING Groep NV's Schedule 13D/A filed October 30, 2008.

(2)

Based on Eric D. Hovde's Form 4 filed March 22, 2010.

(3)

Based on Bank of America Corporation's Schedule 13G/A filed February 1, 2010.

(4)

Based on Dimensional Fund Advisors Inc.'s Schedule 13G/A filed February 8, 2010.

Stock Ownership of our Management

        The following table shows stock ownership information, as of March 30, 2010 for (1) each of our current directors, (2) each of the executive officers and key employees who are listed in the Summary

50

Compensation Table, and (3) all of our current directors, executive officers and key employees as a group:

Title of Class	Name of Beneficial Owner	Amount and Nature of Beneficial Ownership (1)		Percent of Class(2)
Common Stock	Raymond J. Pacini(3)		471,675	4.3%
Common Stock	Phillip R. Burnaman, II(5)		90,164	*
Common Stock	Sandra G. Sciutto(4)		83,335	*
Common Stock	Geoffrey W. Arens		40,159	*
Common Stock	Ed Mountford		30,750	*
Common Stock	Marti P. Murray		17,857	*
Common Stock	John W. Marshall		3,000	*
Common Stock	Michael J. Rafferty		2,000	*
Common Stock	Directors, Executive Officers and Key Employees as a group (8 persons including the above named)		738,940	6.7%

(1)

Except as otherwise indicated in the notes below, the persons indicated above have sole voting and investment power with respect to shares listed. This column includes shares held directly and shares subject to stock options that are currently exercisable or will become exercisable within 60 days.

(2)

These percentages are calculated assuming the exercise of all stock options that are exercisable within 60 days. Asterisks indicate beneficial ownership of 1% or less of the class.

(3)

Includes a total of 450 shares held in accounts of Mr. Pacini's wife and adult children as to which he disclaims beneficial ownership.

(4)

Includes 1,035 shares held in a retirement account owned by Ms. Sciutto's husband as to which she disclaims beneficial ownership.

(5)

Includes vested options to purchase 17,500 shares of our common stock.

Item 13.    Certain Relationships and Related Transactions, and Director Independence

        See "Compensation of Non-Employee Directors" and "Compensation of Executive Officers and Key Employees" in Item 11 above.

        Board Independence.    Each year prior to the mailing of the proxy statement for our annual meeting, the Board of Directors reviews and determines the independence of its directors. During this review, the Board of Directors considers transactions and relationships between each director or any member of his immediate family and our company and its subsidiaries and affiliates. The Board of Directors measures these transactions and relationships against the independence requirements of the Securities and Exchange Commission and The Nasdaq Stock Market LLC. Our Board of Directors has unanimously determined that three of our directors, Messrs. Arens and Burnaman and Ms. Murray, who constitute a majority of our Board of Directors, are "independent" directors, as that term is defined under those rules.

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Item 14.    Principal Accounting Fees and Services

Fees During 2009 and 2008

        The Audit Committee appointed Deloitte & Touche LLP as our independent registered public accounting firm to audit our financial statements for each of the fiscal years ended December 31, 2009 and 2008. The aggregate fees billed by Deloitte & Touche LLP include fees for the following services rendered during those fiscal years are as follows:

		2009	2008
Audit Fees(1)		$308,392	$	400,821
Audit-Related Fees(2)		None		1,300
Tax Fees(3)		None		None
All Other Fees		None		None
	Total Fees	$308,392	$	402,121

(1)

Audit Fees: This category consists of fees for the audit of our annual financial statements, review of the financial statements included in quarterly reports on Form 10-Q and services that are normally provided by the independent registered public accounting firm in connection with statutory and regulatory filings or engagements for those fiscal years. This category also includes advice on audit and accounting matters that arose during, or as a result of, the audit or the review of interim financial statements, and the preparation of an annual "management letter" on internal control matters.

(2)

Audit-Related Fees: This category consists of assurance and related services by Deloitte & Touche LLP that are reasonably related to the performance of the audit or review of our financial statements and are not reported above under "Audit Fees."

(3)

Tax Fees: This category consists of professional services rendered by Deloitte Tax LLP for tax compliance and tax planning.

Pre-Approval Policies and Procedures

        In accordance with the Securities and Exchange Commission's auditor independence rules, the Audit Committee has established policies and procedures by which it approves in advance any audit or permissible non-audit services to be provided to the Firm by its independent registered public accounting firm. The Audit Committee will consider annually and, if appropriate, approve the scope of the audit services to be performed during the year as outlined in an engagement letter proposed by our independent registered public accounting firm. For permissible non-audit services, the Audit Committee will approve in advance all services to be provided by our independent registered public accounting firm and will determine the amount of compensation to be paid, in accordance with the rules of The Nasdaq Stock Market LLC, the Securities and Exchange Commission's rules and regulations and the federal securities laws. Our management will routinely inform the Audit Committee as to the extent of services being provided by our independent registered public accounting firm and the fees incurred for those services.

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PART IV

Item 15.    Exhibits, Financial Statement Schedules

        (a)(1)    Consolidated Financial Statements:

        Our following Consolidated Financial Statements and supplementary data is included in a separate section of this Annual Report commencing on the page numbers specified below:

	Page
Report of Independent Registered Public Accounting Firm		F-1
Consolidated Balance Sheets as of December 31, 2009 and 2008		F-2
Consolidated Statements of Operations and Comprehensive (Loss) Income for the Years Ended December 31, 2009, 2008 and 2007		F-3
Consolidated Statements of Cash Flows for the Years Ended December 31, 2009, 2008 and 2007		F-4
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2009, 2008 and 2007		F-5
Notes to Consolidated Financial Statements		F-6

(2)

Consolidated Financial Statement Schedules:

        All schedules have been omitted because they are not applicable, not required, or the information is included in the Consolidated Financial Statements or notes thereto.

(3)

Listing of Exhibits:

3.01(a)	Amended and Restated Certificate of Incorporation of the Registrant, incorporated by reference to Exhibit 3.1 to the Registrant's Form 8-K filed October 14, 1999.
3.01(b)	Certificate of Amendment to Amended and Restated Certificate of Incorporation, incorporated by reference to Exhibit 3.01(b) to the Registrant's Annual Report on Form 10-K for 2004.
3.02	Amended By-Laws of the Registrant, incorporated by reference to Exhibit 4.03 to the Registrant's Post-Effective Amendment No. 4 to Form S-4, Registration Statement No. 333-29883, filed August 28, 1997.
4.01(a)	Amended and Restated Certificate of Incorporation of the Registrant, incorporated by reference to Exhibit 3.1 to the Registrant's Form 8-K filed October 14, 1999.
4.01(b)	Certificate of Amendment to Amended and Restated Certificate of Incorporation, incorporated by reference to Item 3.01 (b).
4.02	Amended By-Laws of the Registrant, incorporated by reference to Exhibit 4.03 to the Registrant's Post-Effective Amendment No. 4 to Form S-4, Registration Statement No. 333-29883, filed August 28, 1997.
10.01	Amended and Restated 1993 Stock Option/Stock Issuance Plan, incorporated by reference to Exhibit 10.01 to the Registrant's Annual Report on Form 10-K for 2004.
10.01(a)	Amended and Restated 1993 Stock Option/Stock Issuance Plan, incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2006.

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10.01(b)	Amendment Dated June 14, 2006 to Amended and Restated 1993 Stock Option/Stock Issuance Plan, incorporated by reference to Form 8-K filed June 14, 2006.
10.02	Deferred Compensation Plan for Non-Employee Directors of the Registrant, incorporated by reference to Exhibit 10.14 to the Registrant's Registration Statement on Form 10.
10.03	Retirement Plan for Non-Employee Directors of the Registrant, incorporated by reference to Exhibit 10.15 to the Registrant's Registration Statement on Form 10.
10.04*	Retirement Plan of the Registrant, Amended and Restated through December 31, 2009, dated December 21, 2009.
10.05	California Coastal Communities, Inc. 401(k) Plan and Trust Agreement dated effective January 1, 2000, incorporated by reference to Exhibit 10.10 to Registrant's Annual Report on Form 10-K for 1999.
10.11	Audit Committee Policy for Pre-Approval of Auditor Services of the Registrant, incorporated by reference to Exhibit 10.08 to Registrant's original Annual Report on Form 10-K for 2004.
10.12	$125 Million Senior Secured Term Loan Agreement among the Registrant, as Borrower, and KeyBank National Association, as Lender and Agent, et. al., dated September 15, 2006, incorporated by reference to Exhibit 10.1 to Form 8-K filed September 19, 2006.
10.12(a)	First Amendment to Senior Secured Term Loan Agreement with KeyBank National Association, incorporated by reference to Exhibit 10.12A to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2007.
10.12(b)	Third Amendment to Senior Secured Term Loan Agreement with KeyBank National Association, incorporated by reference to Exhibit 10.2 to Form 8-K, filed September 30, 2008.
10.13	$100 Million Senior Secured Revolving Credit Agreement among the Registrant, as Borrower, and KeyBank National Association, as Lender and Agent, et. al., dated September 15, 2006, incorporated by reference to Exhibit 10.2 to Form 8-K filed September 19, 2006.
10.13(a)	First Amendment to Senior Secured Revolving Credit Agreement with KeyBank National Association, incorporated by reference to Exhibit 10.13A to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2007.
10.13(b)	Third Amendment to Senior Secured Revolving Credit Agreement with KeyBank National Association, incorporated by reference to Exhibit 10.1 to Form 8-K, filed September 30, 2008.
10.14	Lease of Model Homes between Signal Landmark, a subsidiary of the Registrant, and Brightwater Models LLC, dated as of December 31, 2008, incorporated by reference to Exhibit 10.1 to Form 8-K, filed January 2, 2009.
21.01*	Subsidiaries of the Registrant.
23.1*	Consent of Independent Registered Public Accounting Firm—Deloitte & Touche LLP.
31.1*	Section 302 Certificate of Raymond J. Pacini, Chief Executive Officer of California Coastal Communities, Inc.

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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.**

*

Filed herewith.

**

These certifications are being furnished solely to accompany this report pursuant to 18 U.S.C. Section 1350, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and are not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

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SIGNATURES

        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: March 30, 2010	CALIFORNIA COASTAL COMMUNITIES, INC.
	By:	/s/ SANDRA G. SCIUTTO Sandra G. Sciutto Senior Vice President and Chief Financial Officer

        Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.

Signature	Title	Date
/s/ GEOFFREY W. ARENS (Geoffrey W. Arens)	Director	March 30, 2010
/s/ PHILLIP R. BURNAMAN II (Phillip R. Burnaman II)	Director	March 30, 2010
/s/ MARTI P. MURRAY (Marti P. Murray)	Director	March 30, 2010
/s/ RAYMOND J. PACINI (Raymond J. Pacini)	President, Chief Executive Officer and Director	March 30, 2010
/s/ SANDRA G. SCIUTTO (Sandra G. Sciutto)	Senior Vice President and Chief Financial Officer	March 30, 2010

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Selected Financial Data

        Set forth below is selected financial data about us and our consolidated subsidiaries. The following information should be read in conjunction with the Consolidated Financial Statements beginning on page F-2 of this Annual Report on Form 10-K and Management's Discussion and Analysis of Financial Condition and Results of Operations.

			Years Ended December 31,
			2009			2008			2007			2006		2005
			(in millions, except per share amounts)
Statement of operations data:
	Homebuilding		$	42.3		$	46.0		$	47.0		$	95.7	$	62.7
	Lot sales			4.9			—			—			—		—
	Non-residential land			—			—			—			—		66.8
		Total revenues		47.2			46.0			47.0			95.7		129.5
	Net (loss) income(a)		$	(22.4	)	$	(44.7	)	$	(18.9	)	$	5.6	$	28.4
	Net (loss) earnings per common share:
		Basic	$	(2.04	)	$	(4.10	)	$	(1.73	)	$	0.54	$	2.78
		Diluted	$	(2.04	)	$	(4.10	)	$	(1.73	)	$	0.53	$	2.70
	Weighted-average shares outstanding:
		Basic		11.0			10.9			10.9			10.4		10.2
		Diluted		11.0			10.9			10.9			10.6		10.5
	Special cash dividend declared per common share			—			—			—		$	12.50		—
Balance sheet data at period end:
	Unrestricted cash, cash equivalents and short-term investments		$	8.9		$	2.3		$	24.3		$	11.1	$	38.0
	Total assets			249.9			312.5			367.6			332.3		330.4
	Debt(b)			204.0			243.2			246.6			188.2		57.9
	Total stockholders' equity		$	33.4		$	55.5		$	101.5		$	123.5	$	246.9
	Shares outstanding at end of period			11.0			10.9			10.9			10.9		10.2
	Stockholders' equity per common share(c)		$	3.04		$	5.09		$	9.31		$	11.33	$	24.21

(a)

In addition to homebuilding operations, net (loss) income for the years ended December 31, 2009, 2008 and 2007 reflects loss on impairment of real estate inventories of $11.7 million, $35.0 million and $32.0 million, respectively. For the year ended December 31, 2005, net income reflects gross margin from the sale of non-residential land at Bolsa Chica, in Orange County, California of $35.5 million. The net (loss) income for the year ended December 31, 2008 also reflects a $4.6 million loss on our Oxnard joint venture investment and $23.2 million of valuation allowances for deferred tax assets. The net (loss) income for the year ended December 31, 2009 also reflects valuation allowances for deferred tax assets of $31.1 million.

(b)

Beginning the year ended December 31, 2006, debt includes borrowings from Revolving Loan, Term Loan, as well as other project debt. Beginning the year ended December 31, 2008, debt also includes $22.5 million related to the sale-leaseback of model homes which is accounted for as a financing. As of December 31, 2009, there is no remaining project debt.

(c)

We believe that stockholders' equity per common share, which is computed by dividing stockholders' equity by common shares outstanding at the end of each period, is a useful supplemental measure of the strength of our balance sheet and an indicator of the historical carrying basis of our net assets. The decrease in the measure from 2005 to 2006 primarily reflects the special dividend of $12.50 per share paid in September 2006.

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Management's Discussion and Analysis of Financial Condition and Results of Operations

        The following discussion should be read together with our Consolidated Financial Statements and Notes which are set forth below commencing on page F-2 of this Annual Report.

Chapter 11 Cases

        We are operating as a debtor-in-possession under Chapter 11 as discussed in more detail in Item 1—Business—Status of the Chapter 11 Cases set forth above in this Annual Report for a more detailed discussion.

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. Weakness in the homebuilding environment continued as unemployment increased, the availability of jumbo-mortgages remained limited and the economic recession continued. Specifically, the credit markets and the mortgage industry have been experiencing a period of unparalleled turmoil and disruption characterized by bankruptcy, financial institution failure, consolidation and an unprecedented level of intervention by the United States federal government. This disruption on the credit markets has made it more difficult for homebuyers to obtain acceptable financing. In addition, the supply of new and resale homes in the marketplace remained excessive for the levels of consumer demand, particularly given the supply of foreclosed homes offered at substantially reduced prices. These pressures in the marketplace resulted in the use of increased sales incentives and price reductions in an effort to generate sales and reduce inventory levels by us and our competitors throughout 2009.

        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 12.4% at the end of 2009 compared with 8.7% at the end of 2008, while the unemployment rate in Orange County was 9.1% in December 2009 compared with 6.5% in December 2008. These adverse conditions have now persisted to varying degrees since the beginning of 2006 and their impact is reflected in our results for 2009, 2008 and 2007. We believe that the weak demand we are experiencing, particularly for homes over $1.0 million, reflects the excess supply of higher end homes in the Huntington Beach market as well as homebuyers' reluctance to make a purchasing decision until they are comfortable that home price declines are near bottom and that economic conditions have stabilized. 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. There can be no assurance that this trend will continue.

        During 2009, the California home-buyer tax credit enacted early in the year (which did not contain income or first-time buyer restrictions and was limited to new homes) appears to have boosted demand somewhat; however, the federal stimulus plan has not had much impact on sales at our Brightwater project due to its income and first-time buyer restrictions. As of August 31, 2009, all of the $100 million in California tax credits had been issued and 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.

        While we have begun to see some positive signs that these negative trends in the overall economy are moderating, such as rising stock markets and fewer new unemployment claims, it remains uncertain when the housing market or the broader economy will experience a meaningful recovery. We anticipate that the overhang of bank-owned homes will continue to bloat the market throughout 2010 as lenders seek to unload their inventory of foreclosed homes. We believe the current conditions may improve during 2010 but will remain challenging, and we expect that our operations may sustain periodic losses

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until the homebuilding industry and economy as a whole demonstrate a sustained rebound. Further, until we are able to restructure our debt through the Chapter 11 Cases, prospective buyers may be reluctant to purchase a home and we may continue to experience slower sales.

        We are also concerned about the dislocation in the secondary mortgage market. 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 February 2010, the spread has narrowed to approximately .50% to .80%. Mortgage market liquidity issues and higher borrowing rates 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.

        While we successfully sold all remaining standing inventory in our inland markets 2009, the price reductions and additional incentives resulted in impairment reserves and significantly reduced gross profits for our inland projects. In response to the ongoing crisis in the housing market and national credit markets, during 2009 we:

•

reduced sales prices and offered incentives for all of our homes in order to eliminate our standing inventory in inland markets and reduce inventory at Brightwater;

•

significantly reduced our lot inventory in the inland market and terminated further construction activity until the market improves;

•

completed a deed-in-lieu transaction for our subsidiary's Hearthside Lane project in Corona, which resulted in a pre-tax gain on debt restructuring of $20.7 million;

•

completed a short-sale of the remaining Woodhaven project in Beaumont which resulted in a pre-tax gain on debt restructuring of $4.1 million;

•

completed a sale of 54 finished lots for our subsidiary's Las Colinas project in Lancaster and repaid the related project loan principal in full; and

•

filed voluntary petitions for relief under Chapter 11 in the Bankruptcy Court in order to restructure approximately $182 million of indebtedness related to our Brightwater project.

        We expect to continue operations at only the four Brightwater communities until we see reasonable signs of a housing market recovery. If market conditions decline further, we may need to take additional charges for inventory impairments in future quarters. In addition, we expect that our results for 2010 will be adversely affected by the costs of restructuring our debt through the Chapter 11 Cases. Our results could also be adversely affected if general economic conditions do not improve further or deteriorate, if consumer confidence remains weak or declines further, if job losses continue or accelerate, if foreclosures or distressed sales increase, or if consumer mortgage lending becomes less available or more expensive, any or all of which would further diminish the prospects for a recovery in housing markets.

        We believe that stability in the credit and capital markets and an eventual renewal of confidence in the national economy will play a major role in any turnaround in the homebuilding and mortgage lending industries. We also believe that a meaningful improvement in housing market conditions will

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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 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:

•

adjusting our cost structure to today's 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;

•

ceasing development at our inland project until the housing market improves;

•

limiting construction starts to better 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 2009 and 2008, we delivered 49 and 55 homes (excluding the sale of 62 finished lots at our Beaumont project and 54 lots at our Quartz Hill project in Lancaster), respectively. As of March 29, 2010, two additional homes have been delivered and 12 additional homes are in escrow, as discussed further under Item 1—Business—Our Current and Future Homesites above.

        Despite the challenges of the current California homebuilding market, we believe the potential for our Brightwater project remains high. Brightwater has not been immune to the effects of the unstable mortgage and housing markets; however, that impact appears less severe than the weakness we have seen in our inland markets. We believe that the reduced impact is a result of Brightwater's superior coastal location, the extremely limited supply of new homes on the coast of Southern California and the absence of significant competition from other homebuilders in the Huntington Beach market due to the lack of available land for the development of new single family detached homes. We believe that Brightwater is in a location that is difficult to replace and in a market where approvals are increasingly difficult to achieve. We also believe that Brightwater has substantial embedded value that should not be sacrificed under current depressed market conditions but, rather, should be realized over time. Finally, we believe that Brightwater's 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.

        During the first nine months of 2009, Brightwater continued to have significant weekly traffic, generating 31 net new sales orders during the period compared with 27 in the first nine months of 2008, with encouraging quarter to quarter increases (from five net orders in the first quarter to 11 in the second and 15 in the third quarter). However, we generated only two net sales orders at Brightwater during the fourth quarters of both 2009 and 2008. We believe the deceleration in sales pace for the fourth quarter of 2009 primarily reflects the negative impact of the Chapter 11 announcement in October 2009. Our pace of sales since December 31, 2009 remained slow, with only five net sales generated through March 29, 2010. We anticipate that sales pace will continue to be negatively impacted until we successfully implement a plan of reorganization.

        We believe that market conditions may continue to be challenging throughout 2010, as unemployment rates remain elevated, foreclosure activity continues to be significant and consumer

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confidence continues to be eroded. Although substantially reduced home prices and relatively low consumer mortgage interest rates for conforming loans 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.

        In view of the continuing significant economic downturn in the housing market, during 2010 our new home construction will be limited to our 356-home Brightwater project located on the Bolsa Chica mesa in Huntington Beach, California. However, there can be no assurance that these strategies or any alternatives will prove successful.

        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 comes.

        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 further, 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 mortgage financing, and the restoration of consumer confidence that can support a decision to buy a home.

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 SEC.

        The following tables set forth key operating and financial data for our homebuilding operations for the years ended December 31, 2009 and 2008.

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Backlog as of December 31

Homes in Backlog							Value ($ in millions)							Average Selling Price ($ in thousands)
2009		2008		Change			2009		2008		Change			2009		2008		Change
	9		8		12.5	%	$	13.8	$	17.0		(18.8	)%	$	1,529	$	2,125		(28.0	)%

Homes Delivered
Year Ended December 31

Homes Delivered							Value ($ in millions)							Average Selling Price ($ in thousands)
2009		2008		Change			2009		2008		Change			2009		2008		Change
	49		55		(10.9	)%	$	42.3	$	46.0		(8.0	)%	$	863	$	837		3.1	%

2009 Compared with 2008

        We reported revenues of $47.2 million and gross operating loss of $2.2 million for 2009, compared with $46.0 million in revenues and gross operating loss of $22.7 million for 2008. Revenues of $47.2 million for 2009 include $42.3 million generated from homebuilding activities, and lot sale revenues of $4.9 million generated from the sale of 62 finished lots at our Woodhaven project in Beaumont in connection with a short sale transaction completed on September 30, 2009 and the sale of 54 finished lots at our Quartz Hill project in Lancaster completed on December 29, 2009. Homebuilding revenues for 2009 reflect 31 deliveries at Brightwater which generated revenues of $37.0 million and gross operating profit of $6.6 million. Gross operating profit for 2009 also includes $1.0 million related to the settlement of accrued seller profit participation related to two completed projects for which the land seller accepted the assignment from our subsidiary of a $700,000 receivable related to infrastructure work, plus $700,000 from the delivery of 18 homes at our inland projects which generated revenues of $5.3 million, and $600,000 from an insurance refund related to the Corona-Hellman project. In addition, finished lot sales at two inland projects generated gross operating profit of $600,000 in 2009. In 2008, we delivered 55 homes, including 23 deliveries at Brightwater which generated revenues of $33.3 million and gross operating profit of $10.8 million, and 32 homes at our inland projects which generated revenues of $12.7 million and gross operating profit of $1.5 million.

        Homebuilding gross operating profit before impairment charges decreased $3.4 million from $12.3 million for 2008 to $8.9 million for 2009. Excluding impairment charges, homebuilding gross margin for 2009 was 21.0% compared with 26.7% in 2008. Gross operating profit for 2009 includes non-cash impairment charges of $11.7 million reflecting fair value reserves for a five-acre unentitled parcel in Huntington Beach and inland projects in Lancaster and Beaumont. The remainder of the Beaumont project (four model homes and 62 finished lots) was sold on September 30, 2009 in a transaction which extinguished the related project debt for less than 100% of the principal balance and the release of the related guaranty.

        Gain on debt restructuring reflects a $20.7 million pre-tax gain related to a deed-in-lieu transaction for our Corona property that we completed on March 31, 2009 and a $4.1 million pre-tax gain related to the short sale transaction at our Woodhaven project in Beaumont that we completed on September 30, 2009, pursuant to which the lender for the note secured by the property accepted the proceeds of the sale in full settlement of the remaining balance on the note and the release of the related guaranty. The Corona deed-in-lieu transaction resulted in a $28.7 million reduction in the note balance and related obligations secured by our Hearthside Lane project. In exchange, we conveyed the remaining 134 finished lots to the investor that purchased the note from IndyMac Federal Bank.

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        Selling, general and administrative expenses decreased $1.7 million for 2009 compared with 2008 primarily reflecting a $1.3 million reduction in selling expenses associated with communities which were active during 2008 but had reduced or no activity in the current year, as well as a $400,000 reduction in compensation and overhead expenses resulting from headcount reductions, and overhead cost savings measures taken during the year.

        Reorganization costs of $1.3 million for 2009 reflect legal and professional fees and other costs associated with the Chapter 11 bankruptcy proceedings.

        The $3.5 million decrease in loss from unconsolidated joint ventures in 2009 compared with 2008 reflects the write-off of our investment in the Oxnard joint venture in December 2008.

        The $600,000 decrease in other expense in 2009 compared with 2008 reflects the absence in 2009 of $800,000 of other expense incurred during 2008 related to an interest rate swap agreement and $800,000 for the write-off of our investment in the Oxnard joint venture. These decreases were partially offset by the assignment of a $700,000 receivable to the land seller who sold lots to our subsidiary, in settlement of an obligation for accrued seller profit participation aggregating $1.0 million, and a $300,000 increase in 2009 pension expense due to lower investment returns in 2008. Other expense also reflects a $200,000 decrease in investment interest income related to our reduced cash balances and market rate of interest earned.

        Income before income taxes was $13.6 million for 2009 which included impairment charges of $11.7 million, compared with a pre-tax loss of $36.4 million in 2008, which reflected a $35.0 million impairment charge.

        Income tax expense of $36.0 million for the year ended December 31, 2009 reflects a combined federal and state tax rate of 41% and a $31.1 million non-cash valuation allowance on deferred tax assets recorded to reflect uncertainties regarding the resolution of the Chapter 11 Cases filed October 27, 2009. These items were partially offset by a $950,000 tax receivable related to federal alternative minimum tax refund claims for tax years 2004, 2005, and 2008 in connection with the Worker, Homeownership and Business Assistance Act of 2009.

2008 Compared with 2007

        We reported revenues of $46.0 million and gross operating loss of $22.7 million for 2008, compared with $47.0 million in revenues and gross operating loss of $26.1 million for 2007. Revenues for 2008 reflect deliveries of 55 homes, including 23 deliveries at Brightwater which generated revenues of $33.3 million and gross operating profit of $10.8 million, and 32 homes at our inland projects which generated revenues of $12.7 million and gross operating profit of $1.5 million. In 2007, we delivered 77 homes, including the first nine deliveries at Brightwater which generated revenues of $11.0 million and gross operating profit of $3.7 million, and 68 homes at our inland projects which generated revenues of $36.0 million and gross operating profit of $2.2 million.

        Gross operating loss for 2008 includes non-cash impairment charges of $35.0 million primarily reflecting fair value write-downs for the Hearthside Lane project in Corona and Las Colinas project in Lancaster of $24.1 million and $6.8 million, respectively, and a $3.4 million charge related to our Woodhaven project in Beaumont. Gross operating loss for 2007 includes non-cash impairment charges of $32.0 million related to the remaining homes at our Chandler Ranch, Alisal at Ontario, Woodhaven, Hearthside Lane and Quartz Hill projects. These impairment charges reflect our current expectations at the time the impairment charges were recorded about selling prices, gross margins, and sales pace for the projects. As required by SFAS 144, should market conditions further deteriorate in the future or other events occur that indicate the carrying amount of our real estate inventories may not be recoverable, we will reevaluate our expected cash flows from each project to determine whether any additional impairment exists at any point in time.

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        Although we delivered 22 fewer homes in 2008, we generated $6.4 million more in gross operating profit before impairment charges from home sales as a result of delivering 14 more homes at Brightwater which generated gross margins of 32.4% in 2008. Increased gross operating profit for Brightwater was partially offset by reduced margins at our inland projects which generated gross margins of 11.8% in 2008 due to the prolonged real estate slowdown which has resulted in lower selling prices and greater incentives in order to remain competitive and move standing inventories in this difficult market. Excluding impairment charges, homebuilding gross margin for 2008 increased to 26.7% compared with 12.6% in 2007, reflecting the increased sale of higher-margin homes at Brightwater.

        The $700,000 increase in selling, general and administrative expense in 2008 compared with 2007 primarily reflects $500,000 of project costs that can no longer be capitalized because the projects are not under construction and $300,000 of additional selling expense, partially offset by a $100,000 reduction in salaries and overhead costs due to reduced headcount in 2008.

        The $900,000 increase in interest expense in 2008 compared with 2007 primarily reflects interest incurred on projects which are no longer under construction and, therefore, must be recorded as a period cost rather than capitalized.

        The $4.1 million increase in loss from unconsolidated joint ventures 2008 compared with 2007 relates primarily to losses on our investment in the Oxnard joint venture due to the uncertainty over the ultimate outcome of ongoing negotiations between the joint venture and the land sellers that, if unsuccessful, will result in the joint venture abandoning the project. Due to this uncertainty we recorded a loss reserve for our entire investment in the venture in December 2008.

        The $2.2 million increase in other expense in 2008 compared with 2007 primarily reflects an $800,000 loss on an interest rate swap agreement which included $1.0 million of cash payments made under the terms of the agreement partially offset by a $200,000 non-cash fair value adjustment. The increase in other expense also reflects an $800,000 loss for unreimbursed project costs for our investment in the Oxnard joint venture that we reserved in December 2008 as discussed above, a $700,000 increase in real estate holding costs due to our inability to capitalize property taxes for inland projects no longer under construction, a $500,000 decrease in investment income related to lower cash balances and a $400,000 increase in legal fees related to ongoing environmental remediation litigation.

        The effective income tax rate for the year ended December 31, 2008 is 12%, which reflects a $23.2 million non-cash valuation allowance on deferred tax assets partially offset by a tax rate of 41%. The effective rate before this reserve is comparable with our effective income tax rate of 41% during 2007.

Liquidity and Capital Resources

        On September 28, 2009, we received a notice of an event of default from KeyBank with respect to the loan-to-value covenant of the Revolving Loan that would give KeyBank 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 from KeyBank 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 give KeyBank the right to accelerate the indebtedness under the Revolving Loan and Term Loan. As of December 31, 2009, $81.7 million and $99.8 million of principal was outstanding under the Revolving Loan and Term Loan, respectively.

        On October 1, 2009, we entered into Revolving Loan and Term Loan forbearance agreements with KeyBank, as a lender and as agent for the other loan syndicate members. However, our subsequent failure to make required interest payments aggregating $759,000 on October 14, 2009 for the Revolving and Term Loans terminated the forbearance period under the forbearance agreements. Therefore, as a result of our nonpayment of $1.7 million of principal that was due on September 30, 2009 and $759,000

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of interest that was due on October 14, 2009, triggering events occurred that could give rise to the immediate acceleration of the payment of all outstanding principal and accrued interest under both the Term and Revolving Loans.

        The filing of the Chapter 11 Petitions on October 27, 2009, also constituted events of default under the Revolving Loan and the Term Loan that can trigger acceleration of the indebtedness. However, the filing of the Chapter 11 Petitions automatically stayed those actions against us and the other Debtors. Under the terms of court orders, we have continued to pay interest on the outstanding principal balance at pre-default interest rates. As of March 30, 2010, approximately $81.7 million and $99.8 million of principal are outstanding under the Revolving Loan and Term Loan, respectively.

        While we are striving to restructure our debt through the Chapter 11 Cases, unless we are successful in amending and extending the terms of the Revolving Loan and Term Loan agreements, we do not believe that our cash, cash equivalents and future real estate sales proceeds will be sufficient to meet our debt obligations or to meet anticipated operating and project development costs for Brightwater, and general and administrative expenses during the next 12 months. These factors raise substantial doubt about our ability to continue as a going concern. The consolidated financial statements herein do not include any adjustments that might result from the outcome of this uncertainty.

        Year-over-year changes in the principal components of our liquidity and capital resources are as follows (in millions, except percentages):

	2009			2008			2007
Cash and cash equivalents	$	8.9		$	2.3		$	24.3
Cash provided by (used in) operating activities		12.3			(15.4	)		(53.1	)
Cash provided by investing activities		2.9			0.2			8.7
Cash provided by (used in) financing activities		(8.6	)		(6.8	)		58.1

        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 management's 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 December 31, 2009 aggregated $8.9 million, the use of which is subject to the Bankruptcy Court's cash management order.

        On September 15, 2006 we entered into the $100 million Revolving Loan and the $125 million Term Loan with KeyBank, as a lender and agent for several other lenders. These loans are described in greater detail Item 1 above and in Notes 6 and 7 to the Consolidated Financial Statements commencing on page F-2 below. Since the filing of the Chapter 11 Cases we have only been paying interest under the Term and Revolving Loans as we continue to develop our plan or reorganization to change principal payment amounts and to extend maturities. As of December 31, 2009, $81.7 million was outstanding under the Revolving Loan. During the year ended December 31, 2009, we made mandatory repayments of $19.2 million and $7.6 million on the Revolving and Term Loans, respectively, in connection with 31 home deliveries at Brightwater during the period.

        On December 29, 2009, a subsidiary of Hearthside Homes completed a sale of 54 finished lots for its Las Colinas project in Lancaster, California for $3.1 million and repaid principal amount of the related project loan in full. Our subsidiary retained approximately $500,000 from the finished lot sale which may be required to resolve its potential obligation for the lender's claim for approximately $500,000 of interest and related costs.

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        On September 30, 2009, a subsidiary of Hearthside Homes completed a sale of 62 finished lots and four models for $2.3 million, thereby disposing the remaining assets of the Woodhaven project in Beaumont, California. The lender for the loan secured by the project accepted the proceeds of the sale in full satisfaction of the outstanding debt and release of the related guaranty. As a result, we recognized a $4.1 million pre-tax gain on debt restructuring during the third quarter of 2009.

        On March 31, 2009, Hearthside Homes, Inc. completed a deed-in-lieu transaction for the Hearthside Lane project in Corona. In exchange for a $28.7 million reduction in the note balance, the subsidiary conveyed the remaining 134 finished lots to the investor that purchased the loan from IndyMac Federal Bank. The subsidiary recognized a $20.7 million pre-tax gain on debt restructuring and retained seven completed homes that secured the then remaining $2.5 million note balance which matures on March 31, 2010. During the second and third quarters of 2009, the subsidiary delivered all of the remaining seven homes and repaid the loan in full.

2009 Compared with 2008

        Cash provided by operating activities of $12.3 million for 2009 primarily reflects net proceeds of $35.8 million generated by 31 deliveries at Brightwater, which were partially offset by investments in Brightwater of $28.5 million, along with $9.9 million generated from deliveries of 18 inland homes and the sale of 116 finished lots at two inland projects.

        Our primary sources of cash during 2009 were $45.7 million of proceeds from sales of real estate inventories and $7.3 million of net borrowings from our revolving loan. Our primary uses of cash during 2009 include $28.5 million of investments in Brightwater and $7.6 million of repayments of our Term Loan.

        The $4.6 million decrease in restricted cash reflects $3.0 million of restricted cash held as interest reserves for our Revolving and Term Loans which was released from restriction upon our filing the Chapter 11 Cases, as well as the assignment of restricted cash related to the Hearthside Lane project to the investor that holds the Hearthside Lane note in connection with the deed-in-lieu transaction and a $400,000 reduction in the interest reserve required under the Term Loan.

        The $37.1 million decrease in deferred tax assets primarily reflects non-cash valuation allowances of $31.1 million, as well as the provision for income taxes which is composed entirely of deferred taxes. There are no current taxes since we have a taxable loss for 2009, primarily due to the recognition of real estate losses for tax purposes that were recorded in prior years for financial statement purposes.

        The $2.2 million decrease in other assets primarily reflects the amortization of $1.6 million of prepaid rent related to our model home financing, as well as $2.2 million of prepaid loan fees amortized during 2009 partially offset by a $950,000 tax receivable for alternative minimum tax refunds, $300,000 of prepaid restructuring costs, and a $600,000 receivable for refundable insurance premiums.

        The $38.9 million decrease in other project debt reflects the resolution of all project debt through the disposal of all properties securing such debt. The transactions included a $26.7 million reduction in the Hearthside Lane note balance as a result of the deed-in-lieu transaction completed during the first quarter of 2009, a $4.1 million reduction in the Woodhaven note balance in connection with the September 30, 2009 short sale of the remaining four model homes and 62 finished lots at the project and the December 29, 2009 sale of 54 finished lots at the Quartz Hill project. In addition, the decrease for 2009 reflects project debt repayments of $8.1 million made from proceeds from home deliveries.

        The $1.2 million decrease in accounts payable and accrued liabilities primarily reflects a $1.0 million settlement of accrued seller profit participation related to two completed projects with the land seller who accepted the assignment from our subsidiary of a $700,000 receivable related to infrastructure work. The decrease also reflects a $700,000 reduction in accrued interest in connection

66

with the repayment or settlement of all outstanding project loans during 2009, offset by a $900,000 increase in accounts payable which includes $700,000 related to restructuring costs.

2008 Compared with 2007

        Cash used in operating activities of $15.4 million for 2008 primarily reflects investments in Brightwater of $39.2 million and reductions in accounts payable of $7.5 million, which were partially offset by net proceeds of $32.6 million generated by 23 deliveries at Brightwater and $10.5 million of net cash flow generated by our inland projects ($12.2 million generated from deliveries of 32 homes less $1.7 million of project investments).

        Our primary sources of cash during 2008 were $44.8 million of proceeds from sales of real estate inventories and $22.5 million of proceeds from our model home financing transaction. Our primary uses of cash during 2008 include $39.2 million of investments in Brightwater, $14.4 million of net repayments of our Term Loan, $9.9 million of net repayments of other project debt, and $1.6 million of net repayments of our Revolving Loan.

        The $7.3 million decrease in deferred tax assets primarily reflects valuation allowances of $23.2 million recorded during the year, partially offset by deferred tax benefits for additional net operating losses generated during 2008.

        The $7.5 decrease in accounts payable and accrued liabilities primarily reflects reductions in accounts payable related to payments of project construction costs due to the declining level of construction activity at our inland projects and the substantial completion of land development and model home construction at Brightwater.

        The $1.8 million increase in other liabilities primarily reflects $2.0 million of additional pension obligations due to loss in investment value during 2008.

Off Balance Sheet Financing

        In the ordinary course of business, we 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 December 31, 2009, we have no land option deposits and no third party guarantees.

        We also 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.

        Our investment in unconsolidated joint ventures totaled less than $100,000 at December 31, 2009 and 2008. These joint ventures had total assets of $200,000 and $300,000 as of December 31, 2009 and 2008, respectively. As of December 31, 2009, we provide no guarantees on debt of unconsolidated joint ventures.

        During the year ended December 31, 2008, we recorded an investment loss of $4.6 million related to our investment in the Oxnard joint venture which reflected our $3.3 million investment in the

67

venture, $800,000 of unreimbursed project costs, and $500,000 of deferred capital contributions that are payable to the non-managing member upon dissolution of the joint venture. The resulting loss allocation upon closing out the venture will be 66% to the non-managing member and 34% to us.

        Under the requirements of ASC 810-10, "Consolidations," certain land option contracts may create a variable interest, with the land seller being identified as a VIE. 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 December 31, 2009, we had no consolidated deposits with VIEs.

        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 in Item 3 above.

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 11 to the Consolidated Financial Statements beginning on page F-2.

Basis of Consolidation

        Our Consolidated Financial Statements include our accounts and all of our majority-owned and controlled subsidiaries and joint ventures. Certain of our wholly-owned subsidiaries are members in joint ventures involved in the development and sale of residential projects and residential loan production. The financial statements of joint ventures in which we generally have a controlling or majority economic interest (and thus are controlled by us) are consolidated with our financial statements. Our investments in unconsolidated joint ventures are accounted for using the equity method when we do not have voting or economic control of the venture operations, as further discussed in Note 5 to the Consolidated Financial Statements beginning on page F-2. All significant intercompany accounts and transactions have been eliminated in consolidation.

68

Impairment of Long-Lived Assets

        We recorded impairment charges during the years ended December 31, 2009 and 2008 as follows (in millions):

Project	Location	2009		2008
Huntington Beach	Huntington Beach	$	5.0	$	—
Inland Empire:
Hearthside Lane	Corona		—		24.1
Woodhaven	Beaumont		3.2		3.4
Alisal at Ontario	Ontario		—		0.6
Chandler Ranch	North Corona		—		0.1
	Subtotal—Inland Empire		3.2		28.2
Lancaster:
Lancaster II	Lancaster		3.5		—
Las Colinas	Lancaster		—		6.8
	Subtotal—Lancaster		3.5		6.8
	Total—All Projects	$	11.7	$	35.0

        During 2009, we recorded impairment charges aggregating $11.7 million, including $5.0 million and $3.5 million recorded during the fourth quarter related to a five-acre parcel in Huntington Beach and the 73-lot Lancaster project due to uncertainty about the projects' future cash flows as a result of the ongoing Chapter 11 Cases. Impairment charges during 2009 also included $3.2 million related to the Woodhaven project in Beaumont. The remainder of the project (four model homes and 62 finished lots) was sold on September 30, 2009 in a transaction which extinguished the related project debt for less than 100% of the principal balance and the release of the related guaranty. The impairment charges were calculated based on market conditions and assumptions made by management that reflected current market conditions at the time such impairment charges were determined, which may differ materially from actual results.

        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 asset's carrying value to the undiscounted estimated cash flows expected from the asset's operations and eventual disposition. If the sum of the undiscounted estimated future cash flows is less than the carrying value of the asset, an impairment loss is recognized based on the fair value of the asset. If impairment occurs, the fair value of an asset is deemed to be the amount a willing buyer would pay a willing seller for such asset in a current transaction. Additionally, as appropriate, we identify alternative courses of action to recover the carrying value of our long-lived assets and evaluate all likely alternatives under a probability-weighted approach as described in ASC 360-10-35.

        In accordance with ASC 360-10-35, in developing estimated future cash flows for impairment testing for our real estate inventories, we incorporated our own market assumptions including those regarding home prices, sales pace, sales and marketing costs, infrastructure and home-building costs, and financing costs regarding real estate inventories. Our assumptions are based, in part, on general economic conditions, the current state of the homebuilding industry, expectations about the short- and long-term outlook for the housing market, and competition from other homebuilders in the areas in which we build and sell homes. These assumptions can significantly affect our estimates of future cash flows. As required by ASC 360-10-35, should market conditions deteriorate in the future or other

69

events occur that indicate the carrying amount of our real estate inventories may not be recoverable, we will reevaluate the expected cash flows from each project to determine whether any additional impairment exists at any point in time. For those communities deemed to be impaired, we determine fair value based on discounted estimated future cash flows using estimated absorption rates for each community.

        We evaluated our Brightwater project for impairment as of December 31, 2009, and determined that no impairment was indicated based on our projection of the project's future cash flows, including projected revenues, costs and gross margin. We based our assumptions on our evaluation of projected prices while reflecting current marketing efforts, review of competitive home sales, characteristics of the Huntington Beach housing market, and current construction costs. Our relatively lower book basis in Brightwater and nearby assets of $234.8 million as of December 31, 2009, is due in part to a fair value adjustment recorded in September 1997 under "Fresh Start" accounting. Since 1997, we have recorded no impairment charges for Brightwater, primarily due to the long holding period and significant increases in home prices since 1997, before the current challenging conditions and price depreciation of the past two years.

        The most critical factors in our Brightwater analysis are projected home prices and direct construction costs, as they are affected by market factors such as home sale competition, the availability of financing for home purchases and competition for direct construction goods and services. Since opening for sales at Brightwater in August 2007, we have reduced prices and offered sales incentives in response to the recent difficult conditions in the housing market. We have reflected these price reductions in our projections which reduced projected gross margins for the project from approximately 30%-40% in 2007 to 25%-35% as of December 2008 and 6%-33% as of December 2009. The decrease in expected margins also reflects greater use of third-party real estate brokers and expected increases in interest rates in connection with restructuring our debt.

        Home prices and direct construction costs are the most critical factors in our impairment analysis and we estimate that a 1% change in home prices or direct construction costs would change gross margin by approximately .75% and .25%, respectively. Due to their subjective and interrelated nature, we cannot meaningfully quantify the impact of potential changes for all of the factors considered in our impairment analysis. While there is risk that additional price reductions may be necessary, it appears unlikely that any future price reductions or direct construction cost increases would result in erosion of the entire positive cash flow that we are currently projecting and result in an impairment charge for this project. However, there can be no assurance in that regard because economic and housing market conditions may continue to worsen or other events beyond our control may occur which could result in a change in our assumptions.

        In our analysis, we noted that the Brightwater project in Huntington Beach is in a mature housing market with very limited new home construction and a low supply of comparable resale homes with views or competitive features. Further, Huntington Beach has consistently outperformed other coastal Orange County cities with average market times of four months compared with seven to eight months in neighboring coastal cities. Notably, since August 2009, supply at the $1.0 million to $1.5 million level has steadily declined from nine months to four months as of January 2010. In January 2009, the City of Huntington Beach's credit rating was raised, reflecting the city's built-out nature and expected economic resilience of the city's 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.

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        In our impairment analysis of the Brightwater project, we also consider projected construction and related costs and the availability of mortgage financing for our potential homebuyers. While mortgage financing for our homes is still challenging, 30-year jumbo mortgage rates have decreased from a national average high of 8.4% in October 2008 to approximately 5.75% currently and lenders are beginning to relax down payment requirements which were as high as 30% for jumbo loans in the Fall of 2009. With the conforming loan maximum in Orange County continuing at $729,750, a significant portion of our potential homebuyers are able to finance a substantial portion of their home purchase at historically low mortgage rates approximating 5.0%.

        The estimation process involved in the determination of value is inherently uncertain since it requires estimates as to future events and market conditions. Such estimation process assumes the Company's ability to complete development and disposition of its real estate properties in the ordinary course of business based on management's present plans and intentions. Economic and market conditions may affect management's development and marketing plans. In addition, the implementation of such development and marketing plans could be affected by the availability of future financing for development and construction activities. Accordingly, the amount ultimately realized from such project may differ materially from current estimates and the project's 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 real estate inventories impairment 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.

        We reported operating losses in 2007 and 2008 primarily reflecting results from our inland projects which have suffered significant decreases in value. These losses were partially offset by profits from

71

home deliveries at our Brightwater project on the coast of Southern California. The impairment losses on our inland projects are not deducted for tax purposes until realized. In 2009, we reported profits from our Brightwater project. In addition, during 2009 we recorded $24.8 million of pre-tax income from cancellation of indebtedness related to our Corona and Beaumont projects.

        While we have reported profitable operations before income taxes for 2009, we reported a taxable loss due to tax losses realized upon inland property dispositions. Therefore, we have written off the approximately $3.8 million value of all of our unutilized NOL expiring in 2009. These tax losses were previously recognized for financial statement purposes when impairment losses were recorded. The current year taxable loss includes the tax losses generated by the Corona property deed-in-lieu transaction, the sale of the final seven homes at the Corona project, the sale of the remaining four model homes and 62 lots at the Beaumont project, and the loss generated by the disposition of 54 inland lots in the city of Lancaster. By accomplishing our goal of disposing of the inland assets during 2009 we have aggregated these tax losses into 2009, and protected 2010 and future taxable income for use of NOLs generated in prior years.

        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 of approximately $31.1 million.

        Due to uncertainties in the estimation process, particularly with respect to changes in facts and circumstances in future reporting periods (carryforward period assumptions), it is reasonably possible that actual results could differ from the estimates used in our historical analyses. Our assumptions require significant judgment because the residential homebuilding industry is cyclical and is highly sensitive to changes in economic conditions. Our current assessment of the need for a valuation allowance is primarily dependent upon utilization of tax net operating losses in the carryforward period and our future projected income. If our results of operations are more or less than projected and there is objectively verifiable evidence to support the realization of a different amount of our deferred tax assets, an adjustment to our valuation allowance may be required to reflect greater expected utilization.

        We remain subject to the general rules of Section 382 of the Internal Revenue Code, which limit the availability of net operating losses if an ownership change occurs. If we were to experience another ownership change, the amount of net operating losses available would generally be limited to an annual amount equal to (i) the value of our equity immediately before the ownership change, multiplied by the long-term tax-exempt rate (4.03% as of March 2010) plus (ii) recognized built-in-gains, defined as those gains recognized within five years of the ownership change subject to an overall limitation of the net unrealized built-in gains existing as of the ownership change date. We estimate that after giving effect to various transactions by stockholders who hold a 5% or greater interest in the company, we have experienced a three-year cumulative ownership shift of approximately 29% as of March 29, 2010, as computed in accordance with Section 382. In the event of an ownership change, our use of our NOLs may be limited.

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 buyer's 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

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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 10 and 12 to our Consolidated Financial Statements beginning on page F-2. 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.

New Accounting Pronouncements

        In August 2009, the FASB issued Accounting Standards Update ("ASU") No. 2009-05 ("ASU 2009-05"), "Fair Value Measurements and Disclosures (Topic 820)—Measuring Liabilities at Fair Value," which provides guidance on measuring the fair value of liabilities under FASB ASC 820. ASU 2009-05 is effective for interim and annual periods beginning after August 28, 2009. We do not expect the adoption of ASU 2009-05 to have a material effect on our Consolidated Financial Statements.

        In June 2009, the FASB issued SFAS No. 168, "The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162" ("SFAS 168", or ASC 105), which establishes the FASB ASC as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with generally accepted accounting principles in the United States of America. SFAS 168 is effective for interim and annual reporting periods ending after September 15, 2009. We adopted SFAS 168 for the reporting period ended September 30, 2009. The adoption of SFAS 168 did not have a material effect on our Consolidated Financial Statements.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To The Board of Directors and Stockholders
of California Coastal Communities, Inc. (Debtor-in-Possession):

We have audited the accompanying consolidated balance sheets of California Coastal Communities, Inc. and subsidiaries (Debtor-in-Possession) (the "Company") as of December 31, 2009 and 2008, and the related consolidated statements of operations and comprehensive loss, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2009. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of California Coastal Communities, Inc. and subsidiaries as of December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 2 to the consolidated financial statements, the Company has filed for reorganization under Chapter 11 of the United States Bankruptcy Code. The accompanying financial statements do not purport to reflect or provide for the consequences of the bankruptcy proceedings. In particular, such financial statements do not purport to show (a) as to assets, their realizable value on a liquidation basis or their availability to satisfy liabilities; (b) as to prepetition liabilities, the amounts that may be allowed for claims or contingencies, or the status and priority thereof; (c) as to equity accounts, the effect of any changes that may be made in the capitalization of the Company; or (d) as to operations, the effect of any changes that may be made in its business.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company's potential inability to negotiate and obtain confirmation of a mutually agreeable plan of reorganization and to address its current and future debt maturities raise substantial doubt about the Company's ability to continue as a going concern. Management's plans concerning these matters are also discussed in Note 2 to the consolidated financial statements. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ Deloitte & Touche LLP

Costa Mesa, California
March 30, 2010

F-1

CALIFORNIA COASTAL COMMUNITIES, INC. AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

CONSOLIDATED BALANCE SHEETS

			December 31
			2009			2008
			(in millions)
ASSETS
Cash and cash equivalents			$	8.9		$	2.3
Restricted cash				0.8			5.4
Real estate inventories				235.4			260.7
Deferred tax assets				—			37.1
Other assets, net				4.8			7.0
			$	249.9		$	312.5
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities not subject to compromise:
	Accounts payable and accrued liabilities		$	2.9		$	5.0
	Model home financing			22.5			22.5
	Revolving loan			—			74.4
	Term loan			—			107.4
	Other project debt			—			38.9
	Other liabilities			0.4			8.8
		Total liabilities not subject to compromise		25.8			257.0
Liabilities subject to compromise:
	Accounts payable and accrued liabilities			0.9			—
	Revolving loan			81.7			—
	Term loan			99.8			—
	Other liabilities			8.3			—
		Total liabilities subject to compromise		190.7			—
Commitments and contingencies
Stockholders' equity:
Common Stock—$.05 par value; 13,500,000 shares authorized; 10,995,902 and 10,870,902 shares issued and outstanding, respectively				0.5			0.5
Excess Stock—$.05 par value; 13,500,000 shares authorized; no shares outstanding				—			—
Additional paid-in capital				59.5			59.4
Accumulated deficit				(24.0	)		(1.6	)
Accumulated other comprehensive loss				(2.6	)		(2.8	)
	Total stockholders' equity			33.4			55.5
			$	249.9		$	312.5

See accompanying notes to consolidated financial statements.

F-2

CALIFORNIA COASTAL COMMUNITIES, INC. AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS

			For the Years Ended December 31,
			2009			2008			2007
			(in millions, except per share amounts)
Revenues:
	Homebuilding		$	42.3		$	46.0		$	47.0
	Lot sales			4.9			—			—
				47.2			46.0			47.0
Cost of sales:
	Homebuilding			33.4			33.7			41.1
	Lot sales			4.3			—			—
	Loss on impairment of real estate inventories			11.7			35.0			32.0
				49.4			68.7			73.1
		Gross operating loss		(2.2	)		(22.7	)		(26.1	)
Selling, general and administrative expenses				4.9			6.6			5.9
Reorganization costs				1.3			—			—
Interest expense				0.8			1.0			0.1
Gains on debt restructuring and extinguishment				(24.8	)		—			—
Loss (income) from unconsolidated joint ventures				—			3.5			(0.6	)
Other expense, net				2.0			2.6			0.4
	Income (loss) before income taxes			13.6			(36.4	)		(31.9	)
Provision (benefit) for income taxes				36.0			8.3			(13.0	)
Net loss			$	(22.4	)	$	(44.7	)	$	(18.9	)
Other comprehensive income (loss), net of income taxes:
	Minimum pension liability adjustment			0.2			(1.4	)		0.1
Comprehensive loss			$	(22.2	)	$	(46.1	)	$	(18.8	)
Net loss per common share:
	Basic and diluted		$	(2.04	)	$	(4.10	)	$	(1.73	)
Common equivalent shares:
	Basic and diluted			11.0			10.9			10.9
Special dividend paid per common share outstanding			$	—		$	—		$	—

See accompanying notes to consolidated financial statements.

F-3

CALIFORNIA COASTAL COMMUNITIES, INC. AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

CONSOLIDATED STATEMENTS OF CASH FLOWS

				For the Years Ended December 31,
				2009			2008			2007
				(in millions)
Cash flows from operating activities:
	Net loss			$	(22.4	)	$	(44.7	)	$	(18.9	)
	Adjustments to reconcile net income to cash used in operating activities:
		Gains on debt restructuring and extinguishment (Note 9)			(24.8	)		—			—
		Equity in loss (earnings) of unconsolidated joint ventures			—			3.0			(0.6	)
		Model homes depreciation			0.3			0.7			—
		Deferred taxes			4.9			(15.0	)		(13.0	)
		Deferred tax asset valuation allowance			31.1			23.2			—
		Gains on sales of real estate inventories			(9.5	)		(12.3	)		(5.9	)
		Loss on impairment of real estate inventories			11.7			35.0			32.0
		Proceeds from sale of real estate inventories, net			45.7			44.8			45.2
		Investments in real estate inventories			(26.9	)		(40.9	)		(91.8	)
		Non-cash reorganization items			0.4			—			—
		Other			0.1			—			0.5
	Changes in operating assets and liabilities:
		Decrease (increase) in other assets			1.4			(1.4	)		0.9
		Increase (decrease) in accounts payable, accrued and other liabilities			0.3			(7.8	)		(1.5	)
			Cash provided by (used in) operating activities		12.3			(15.4	)		(53.1	)
Cash flows from investing activities:
	Sales of short-term investments				—			—			0.5
	Investments in unconsolidated joint ventures				—			(0.4	)		(0.4	)
	Change in restricted cash				2.9			0.6			8.6
			Cash provided by investing activities		2.9			0.2			8.7
Cash flows from financing activities:
	Borrowings of revolving loan				26.5			45.3			69.7
	Repayments of revolving loan				(19.2	)		(46.9	)		(12.0	)
	Repayments of term loan				(7.6	)		(14.4	)		(3.2	)
	Borrowings of other project debt				—			1.1			24.0
	Repayments of other project debt				(8.1	)		(11.0	)		(20.1	)
	Proceeds from model home financing				—			22.5			—
	Deferred financing costs				(0.2	)		(3.4	)		(0.3	)
			Cash (used in) provided by financing activities		(8.6	)		(6.8	)		58.1
Net increase (decrease) in cash and cash equivalents					6.6			(22.0	)		13.7
Cash and cash equivalents—beginning of year					2.3			24.3			10.6
Cash and cash equivalents—end of year				$	8.9		$	2.3		$	24.3
Supplemental disclosures of cash flow information:
	Cash paid during the period for income taxes, net of refunds received			$	0.1		$	—		$	0.2
	Cash paid during the period for reorganization items				0.9			—			—
Supplemental disclosures of non-cash investing and financing activities:
	Minimum pension liability adjustment recorded as other comprehensive (loss) income, net of income tax (benefit) expense of $.2 million, $(.9) million, and $0, respectively				0.2			(1.4	)		0.1
	Amortization of deferred financing costs capitalized in real estate inventories				2.2			1.6			0.9
	Decrease in project debt and accrued liabilities due to debt restructuring				32.8			—			—

See accompanying notes to consolidated financial statements.

F-4

CALIFORNIA COASTAL COMMUNITIES, INC. AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

		Common Stock							(Accumulated Deficit) Retained Earnings			Accumulated Other Comprehensive Loss
						Additional Paid-In Capital
		Shares		Stock											Total
		(in millions)
Balance at January 1, 2007			10.9	$	0.5	$	62.3		$	62.2		$	(1.5	)	$	123.5
	Net loss				—		—			(18.9	)		—			(18.9	)
	Other comprehensive income, net of income taxes				—		—			—			0.1			0.1
	Stock-based compensation expense—stock options				—		0.1			—			—			0.1
	Adoption of ASC 740-10 (Note 11)		—		—		(3.1	)		(0.2	)		—			(3.3	)
Balance at December 31, 2007			10.9		0.5		59.3			43.1			(1.4	)		101.5
	Net loss				—		—			(44.7	)		—			(44.7	)
	Other comprehensive loss, net of income taxes				—		—			—			(1.4	)		(1.4	)
	Stock-based compensation expense		—		—		0.1			—			—			0.1
Balance at December 31, 2008			10.9		0.5		59.4			(1.6	)		(2.8	)		55.5
	Net loss				—		—			(22.4	)		—			(22.4	)
	Other comprehensive income, net of income taxes				—		—			—			0.2			0.2
	Stock-based compensation expense—stock options				—		0.1			—			—			0.1
Balance at December 31, 2009			10.9	$	0.5	$	59.5		$	(24.0	)	$	(2.6	)	$	33.4

See accompanying notes to consolidated financial statements.

F-5

CALIFORNIA COASTAL COMMUNITIES, INC. AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1—Formation and Basis of Presentation

        California Coastal Communities, Inc. including its consolidated subsidiaries (Debtor-in-Possession) (the "Company") was formerly known as Koll Real Estate Group, Inc. (October 1993—April 1998), The Bolsa Chica Company (July 1992—September 1993), Henley Properties Inc. (December 1989—July 1992) and The Henley Group, Inc. (December 1988—December 1989). The principal activities of the Company currently include: (i) obtaining zoning and other entitlements for land it owns or controls through purchase options or joint ventures, (ii) improving the land for residential development, and (iii) designing, constructing and selling single-family homes in Southern California. Once the residential land is entitled, the Company 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.

        On December 31, 1989, The Henley Group, Inc. separated its business into two public companies through a distribution to its common stockholders of all of the common stock of a newly formed Delaware corporation to which The Henley Group, Inc. had contributed its non-real estate development operations, certain assets and related and unrelated liabilities. The new company was named The Henley Group, Inc. ("Henley Group") immediately following the distribution. The remaining company was renamed Henley Properties Inc. ("Henley Properties") and consisted of the real estate development business and assets of Henley Group, including its principal subsidiary Signal Landmark.

        On July 16, 1992, a subsidiary of Henley Properties merged with and into Henley Group (the "Merger") and Henley Group became a wholly owned subsidiary of Henley Properties. In the Merger, Henley Properties, through its Henley Group subsidiary, received net assets having a book value as of July 16, 1992 of approximately $45.3 million. In connection with the Merger, Henley Properties was renamed The Bolsa Chica Company.

        On September 30, 1993, a subsidiary of The Bolsa Chica Company acquired the domestic real estate development business and related assets of The Koll Company. In connection with this acquisition, The Bolsa Chica Company was renamed Koll Real Estate Group, Inc.

        On September 2, 1997, the Company completed a recapitalization ("Recapitalization"). The Recapitalization, which was effective pursuant to a prepackaged plan of reorganization that was confirmed by the U.S. Bankruptcy Court, resulted in the exchange of all the then existing Debentures, Series A Preferred Stock and Class A Common Stock into new Common Stock. The prepackaged plan was filed by the Company, excluding all of its subsidiaries and affiliates, contemporaneously with a voluntary petition for relief under Chapter 11 of the bankruptcy code in July 1997. Upon the Recapitalization, the Company adopted the provisions of Statement of Position ("SOP") No. 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" ("Fresh-Start Reporting"). Accordingly, all assets and liabilities were revalued to reflect their reorganization value, approximating their fair value at the effective date of the Recapitalization. In addition, the accumulated deficit of the Company was eliminated and its capital structure recast in conformity with the Recapitalization and, as such, the Company has recorded the effects of the Recapitalization and Fresh-Start Reporting as of the effective date.

        On April 30, 1998, the Company sold its commercial development business. Immediately following the sale, Koll Real Estate Group, Inc. was renamed California Coastal Communities, Inc.

F-6

CALIFORNIA COASTAL COMMUNITIES, INC. AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 1—Formation and Basis of Presentation (Continued)

        The accompanying Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America and include the accounts of the Company and its wholly-owned subsidiaries. Intercompany accounts and transactions have been eliminated.

Note 2—Chapter 11 Proceedings and Plans of Management

        On October 27, 2009, the Company and certain of its direct and indirect wholly-owned subsidiaries (collectively with the Company, the "Debtors") filed voluntary petitions (the "Chapter 11 Petitions") for relief under chapter 11 of title 11 ("Chapter 11") of the United States Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the Central District of California (the "Bankruptcy Court"). The Chapter 11 Petitions are being jointly administered under the caption In re California Coastal Communities, Inc., Case No. 09-21712-TA (the "Chapter 11 Cases"). The Debtors continue to operate their businesses and manage their properties as "debtors-in-possession" under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. The Debtors have obtained the Bankruptcy Court's 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 to the senior secured revolving credit agreement ("Revolving Loan") or the senior secured term loan ("Term Loan") and are not Debtors in the Chapter 11 Cases. These subsidiaries are former owners of businesses unrelated to the Company's current operations and have no current material operations.

Loan Defaults Preceding Chapter 11 Cases

        On September 28, 2009, the Company received a notice of an event of default from KeyBank National Association ("KeyBank") with respect to the loan-to-value covenant of the Revolving Loan that would give KeyBank the right to accelerate the indebtedness under the Revolving Loan and the Term Loan. In addition, on October 1, 2009, the Company received a notice of an event of default from KeyBank with respect to the Company's nonpayment of approximately $1.7 million of principal that was due on September 30, 2009 under the terms of the Revolving Loan that would give KeyBank the right to accelerate the indebtedness under the Revolving Loan and the Term Loan. As of December 31, 2009, $81.7 million and $99.8 million of principal was outstanding under the Revolving Loan and Term Loan, respectively.

        On October 1, 2009, the Company entered into a Revolving Loan forbearance agreement ("Revolving Forbearance Agreement") and a Term Loan forbearance agreement ("Term Forbearance Agreement") with KeyBank, as a lender and as agent for the other loan syndicate members under the Revolving Loan and the Term Loan. However, the Company's subsequent failure to make required interest payments aggregating $759,000 on October 14, 2009 for the Revolving Loan and Term Loan

F-7

CALIFORNIA COASTAL COMMUNITIES, INC. AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 2—Chapter 11 Proceedings and Plans of Management (Continued)

terminated the forbearance period provided under the Forbearance Agreements. Therefore, as a result of the Company's nonpayment of $1.7 million of principal that was due on September 30, 2009 and $759,000 of interest that was due on October 14, 2009, triggering events have occurred that could give rise to the immediate acceleration of the payment of all outstanding principal and accrued interest under both the Term and Revolving Loans.

        The filing of the Chapter 11 Cases also constituted events of default under the Revolving Loan and Term Loan that can trigger acceleration of the indebtedness. However, the filing of the Chapter 11 Petitions automatically stayed those actions against the Company and the other Debtors. As of March 30, 2010, approximately $81.7 million and $99.8 million of principal is outstanding under the Revolving Loan and Term Loan, respectively, excluding default interest which the Company is not required to pay under the Court's cash management order.

Plans of Management

        On March 26, 2010, the Company filed a proposed disclosure statement and proposed joint plan of reorganization with the Bankruptcy Court, neither of which has been approved by the Bankruptcy Court. The proposed joint plan provides for the extension of the Revolving Loan and the Term Loan to enable the Company to complete construction and sale of the homes at its Brightwater project. Throughout the Chapter 11 reorganization process the Company has continued and will continue to try to work with the various members of its lending syndicate to determine whether a consensual restructuring of the Revolving Loan and the Term Loan can be accomplished. However, there can be no assurance that the Company and the other Debtors will be able to successfully confirm, consummate and execute a plan of reorganization with respect to the Chapter 11 Cases that is acceptable to the Bankruptcy Court and the creditors and other parties in interest. If the disclosure statement is approved, the Company will have the exclusive right to solicit acceptance of its plan through June 22, 2010.

        The Company and the other Debtors continue to operate their business as debtors-in-possession. The Company has incurred and will continue to incur significant costs associated with the reorganization which are expected to significantly affect the Company's results of operations. From October 27, 2009 through December 31, 2009, the Company incurred reorganization costs aggregating approximately $1.3 million.

        The Company has maintained business operations through the reorganization process. The Company's liquidity and capital resources, however, are significantly affected by the Chapter 11 Cases, which have resulted in various restrictions on its activities, limitations on financing and a need to obtain Bankruptcy Court approval for various matters. In particular, the Debtors are not permitted to make any payments on pre-petition liabilities without prior Bankruptcy Court approval. However, the Debtors have been granted relief in order to continue wage and salary payments and other employment benefits to employees as well as other related pre-petition obligations; to continue to construct and sell homes; and to pay certain pre-petition trade claims held by critical vendors with lien rights.

        As a result of the filing of the joint plan of reorganization, the Company's authorization to continue to use cash collateral with the consent of the lending syndicate will terminate on April 2, 2010. Therefore, on March 26, 2010, the Company filed a motion for authority to continue to use cash

F-8

CALIFORNIA COASTAL COMMUNITIES, INC. AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 2—Chapter 11 Proceedings and Plans of Management (Continued)

collateral over the objections of the lending syndicate. A hearing on that motion is scheduled for March 31, 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 Company's 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 Company's operations.

        The Company depends on cash flows generated from operations and available borrowing capacity to fund its Brightwater development, and to meet its debt service and working capital requirements. However, the Company's ability to continue to generate sufficient cash flows has been and will continue to be adversely affected by continued difficulties in the homebuilding industry and continued weakness in the California economy. During the first nine months of 2009, the Company generated 31 net sales orders at Brightwater, increased construction starts during the second and third quarters to keep pace with sales orders, and started construction of a limited number of speculative homes which are in greater demand in today's market than contract homes that are constructed over a five to seven month period. Brightwater generated significant weekly traffic and encouraging quarter to quarter increases (from five net orders in the first quarter to 11 in the second and 15 in the third quarter) during the first nine months of 2009. However, the Company generated only two net sales orders at Brightwater during the fourth quarter of 2009 which the Company believes reflects the negative impact of the Chapter 11 Cases, as well as the seasonal slowdown in sales. Thus far in 2010, the pace of sales has continued to be slow, with only five net sales generated through March 29, 2010. Further, while sales of the Trails and Sands products, which are generally under $1.0 million, increased during 2009, sales of the Company's larger Cliffs and Breakers homes continue to be challenged by limitations on jumbo-mortgage financing and the downturn in the housing market, which have reduced demand for homes exceeding $1.0 million.

        Due to cash requirements for on-going home construction and scheduled debt amortization, the Company's ability to meet future loan repayment requirements will depend on the confirmation of a plan of reorganization by the bankruptcy court. Based on Brightwater sales in 2009, which were primarily for the smallest Brightwater home product (The Trails), the current product mix of home sales is not expected to generate sufficient cash flow to meet the Company's future scheduled loan repayments for the Revolving Loan and Term Loan as currently structured, as described in greater detail in Notes 6 and 7.

        Continuing negative conditions in the housing and credit markets give rise to uncertainty as to the Company's present and future ability to meet its projected home sale closings and whether modified or new financings can be obtained in order for the Company to meet its debt obligations. The Company, like many other homebuilders, is constantly evaluating potential alternatives regarding its capital structure including, but not limited to, various strategies for restructuring existing debt financings and raising additional capital. 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 uncertainty as to the ability of the Company to secure replacement financing, if needed, and the terms of such financing if it is available. The current housing

F-9

CALIFORNIA COASTAL COMMUNITIES, INC. AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 2—Chapter 11 Proceedings and Plans of Management (Continued)

and mortgage markets also present significant uncertainty as to the Company's ability to achieve sufficient positive cash flow from operations required to satisfy its debt obligations and meet financial covenant requirements. See Notes 6 and 7 for further discussion.

        While the Company is striving to restructure its debt through the Chapter 11 Cases, unless the Company is successful in amending and extending the terms of the Revolving Loan and Term Loan agreements, the Company does not believe that its cash, cash equivalents and future real estate sales proceeds will be sufficient to meet its debt obligations or to meet anticipated operating and project development costs for Brightwater, and general and administrative expenses during the next 12 months. These factors raise substantial doubt about the Company's ability to continue as a going concern. The Consolidated Financial Statements herein do not include any adjustments that might result from the outcome of this uncertainty.

Liabilities Subject to Compromise

        Liabilities subject to compromise refers to pre-petition obligations which may be impacted by the Chapter 11 Cases. These amounts represent the Company's 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 period from October 27, 2009 through December 31, 2009, cash paid for restructuring costs was approximately $900,000.

Note 3—Significant Accounting Policies

Use of Estimates

        The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management reviews its estimates based upon currently available information. Actual results could differ from those estimates.

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 Company's wholly-owned subsidiaries are members in joint ventures involved in the development and sale of residential projects

F-10

CALIFORNIA COASTAL COMMUNITIES, INC. AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 3—Significant Accounting Policies (Continued)

and residential loan production. The financial statements of joint ventures in which the Company has a controlling or majority economic interest (and thus are controlled by the Company) are consolidated with the Company's financial statements. The Company's 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. 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 Annual Report on Form 10-K, 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.

        On March 26, 2010, the Company filed a proposed disclosure statement and proposed joint plan of reorganization with the Bankruptcy Court. As a result of the filing of the joint plan of reorganization, the Company's authorization to continue to use cash collateral with the consent of the lending syndicate will terminate on April 2, 2010. Therefore, on March 26, 2010, the Company filed a motion for authority to continue to use cash collateral over the objections of the lending syndicate. A hearing on that motion is scheduled for March 31, 2010. See "Plans of Management" in Note 2 above for additional discussion.

Cash Flows and Debt Compliance

        Negative conditions in the current housing and credit markets give rise to uncertainty as to the Company's present and future ability to meet its projected home sale closings and whether new or modified financings can be obtained, if needed. The Company, like many other homebuilders, is constantly evaluating potential alternatives regarding its capital structure including, but not limited to, various strategies for restructuring its debt and raising additional capital. There can be no assurance

F-11

CALIFORNIA COASTAL COMMUNITIES, INC. AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 3—Significant Accounting Policies (Continued)

that the Company will be successful in any of these endeavors. The limited credit availability for small businesses presents uncertainty as to the ability of the Company to secure additional financing, if needed, and the terms of such financing if it is available, and as to the ability of the Company to achieve positive cash flow from operations required to satisfy its obligations. See Notes 7 and 8 for further discussion.

Segment Information

        ASC 280, "Segment Reporting," establishes standards for the manner in which public enterprises report information about operating segments. The Company's operations are managed as a single business of homebuilding with entitlement and land development activities employed as necessary. The Company does not maintain any operational offices in any other location and all decisions are centralized. The Company operates in the single-family residential market with no commercial, multi-family building, land or lot sales, and in one geographic region within Southern California. Therefore, for financial reporting purposes, the Company aggregates homebuilding and land development into a single reportable segment.

Cash and Cash Equivalents and Restricted Cash

        The Company considers all highly liquid instruments with a maturity of three months or less when purchased to be cash and cash equivalents. The Company's restricted cash represents proceeds from the sale of finished lots at the Quartz Hill project which are restricted as to their use and cash held as security for environmental remediation at a discontinued operation.

Real Estate Inventories

        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 Company's ability to complete development and dispose of its real estate properties in the ordinary course of business based on management's present plans and intentions. Economic, market, and environmental conditions will affect management's development and marketing plans. In addition, the implementation of such development and marketing plans could be affected by the availability of future financing for development and construction activities. Accordingly, the ultimate values of the Company's real estate properties depend upon future economic and market conditions, and the availability of financing.

        The cost of sales of multi-unit projects is computed using the relative sales value method. Interest and other carrying costs are capitalized to real estate projects during their development and construction period.

Impairment of Long-Lived Assets

        The Company assesses the impairment of real estate inventories and other long-lived assets in accordance with ASC 360-10-35, "Impairment or Disposal of Long-Lived Assets," which requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that

F-12

CALIFORNIA COASTAL COMMUNITIES, INC. AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 3—Significant Accounting Policies (Continued)

the carrying amount of an asset may not be recoverable. Impairment is evaluated by comparing an asset's carrying value to the undiscounted estimated cash flows expected from the asset's 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 years ended December 31, 2009, 2008 and 2007, the Company recorded impairment charges totaling $11.7 million, $35.0 million, and $32.0 million, respectively. See Note 4—Real Estate Inventories.

        In accordance with ASC 360-10-35, in developing estimated future cash flows for impairment testing for its real estate inventories, the Company has incorporated its own market assumptions including those regarding home prices, sales pace, sales and marketing costs, infrastructure and home-building costs, and financing costs regarding real estate inventories. The Company's 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 Company's 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 Company's ability to complete development and disposition of its real estate properties in the ordinary course of business based on management's present plans and intentions. Economic and market conditions may affect management's development and marketing plans. In addition, the implementation of such development and marketing plans could be affected by the availability of future financing for development and construction activities. Accordingly, the amount ultimately realized from such project may differ materially from current estimates and the project's carrying value.

        The Company believes that 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 the Company's Consolidated Financial Statements. The critical assumptions in the Company's evaluation of real estate inventories impairment 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

        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

F-13

CALIFORNIA COASTAL COMMUNITIES, INC. AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 3—Significant Accounting Policies (Continued)

of being able to realize the future benefits indicated by deferred tax assets. A valuation allowance is established against a deferred tax asset if, based on the available evidence, it is "more likely than not" that such asset will not be realized. The realization of a deferred tax asset ultimately depends on the existence of sufficient taxable income in either the carryback or carryforward periods under tax law. The Company evaluates on a quarterly basis, whether a valuation allowance should be established based on its determination of whether it is "more likely than not" that some portion or all of the deferred tax assets will be realized. In the Company's 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 Company's experience with operating loss and tax credit carryforwards not expiring unused, and tax planning alternatives.

        The Company's 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 Company's 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 Company's actual tax results and its future business results may affect the amount of the Company's deferred tax liabilities or the valuation of its deferred tax assets over time.

        During the years ended December 31, 2009, 2008 and 2007, the Company recorded valuation allowances on deferred tax assets totaling $31.1 million, $23.2 million, and zero, respectively. See Note 11—Income 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 Company's historical analyses. The Company's assumptions require significant judgment because the residential homebuilding industry is cyclical and is highly sensitive to changes in economic conditions. The Company's current assessment of the need for a valuation allowance is primarily dependent upon utilization of tax net operating losses in the carryforward period and its future projected taxable income. The Chapter 11 filing constitutes significant negative evidence under ASC 740-10 as it represents uncertainties related to future projected taxable income. Additionally, there are critical uncertainties as to whether the Company will be able to continue selling homes at its Brightwater project using currently projected sales prices and absorption rates in light of the continuing deterioration in the housing and credit markets. If certainty increases regarding the Company's projected results of operations and there is objectively verifiable evidence to support the realization of a portion of its deferred tax assets, an adjustment to the Company's valuation allowance may be recorded to reflect greater expected utilization.

Homebuilding Revenues and Cost of Sales

        The Company's 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 buyer's ability to qualify for financing. Revenue from the sale of homes is

F-14

CALIFORNIA COASTAL COMMUNITIES, INC. AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 3—Significant Accounting Policies (Continued)

recognized at the close of escrow when title passes to the buyer and the earnings process is complete. As a result, the Company's 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 Company's construction costs are comprised of direct and allocated costs, including estimated costs for future warranties and indemnities. The Company's estimates are based on historical results, adjusted for current factors.

Home Warranty Costs

        Warranty reserves are established as homes close escrow in an amount estimated to be adequate to cover expected warranty-related costs for materials and outside labor to be incurred during the warranty period. Reserves are determined based upon historical data with respect to similar product types and other factors.

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. The table below sets forth the reconciliation of the denominator of the earnings per share calculation (in millions):

	2009		2008		2007
Shares used in computing basic earnings per common share		11.0		10.9		10.9
Dilutive effect of stock options		—		—		—
Shares used in computing diluted earnings per common share		11.0		10.9		10.9

Stock-Based Compensation

        The Company uses a fair value based method of accounting for share-based compensation provided to employees. Stock options are valued using a fair-value-based option-pricing model and the fair value is recognized as an expense over the period in which the options vest. The Company elected the alternative transition method, which includes a simplified calculation method, to establish the beginning pool of excess tax benefits ("APIC pool") available to absorb any tax deficiencies.

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 Company's financial instruments including cash and cash equivalents, restricted cash, accounts payable and accrued liabilities, model home financing, and other liabilities approximate their respective fair

F-15

CALIFORNIA COASTAL COMMUNITIES, INC. AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 3—Significant Accounting Policies (Continued)

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 Company's Revolving Loan and Term Loan, the carrying amounts of the debt may not approximate fair value as of December 31, 2009. Accordingly, the fair value of debt that is included in liabilities subject to compromise in the Company's consolidated balance sheets cannot be reasonably determined as of December 31, 2009, 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. As of December 31, 2008, the carrying amounts of the project debt approximate fair value given its current maturities.

        The following table summarizes the Company's fair value measurements during 2009 (in millions):

Description	Fair Value Hierarchy	Fair Value (a)		Impairment Charges for the Year Ended December 31, 2009		Impairment Charges for the Three Months Ended December 31, 2009
Real estate inventories	Level 3	$	8.6	$	11.7	$	8.5

(a)

Amount represents the aggregate fair value for communities where the Company recognized noncash inventory impairment charges during the period, as of the date that the fair value measurements were made. The carrying values for these communities may have subsequently increased or decreased from the fair values reflected due to activity that has occurred since the measurement date.

        During the fourth quarter of 2009, real estate inventories with a carrying value of $14.1 million related to the Company's 73-lot Lancaster project and a five-acre parcel in Huntington Beach were determined to be impaired due to uncertainty about the projects' future cash flows as a result of the ongoing Chapter 11 Cases and were written down to their estimated fair value of $5.6 million. See Note 9 for additional discussion.

        In addition, during the first quarter of 2009, real estate inventories with a carrying value of $6.2 million related to the Woodhaven project in Beaumont, California were determined to be impaired and were written down to their estimated fair value of $3.0 million, resulting in an impairment charge of $3.2 million. See "Impairment of Real Estate Inventories" above and Note 4—Real Estate Inventories. On September 30, 2009, a subsidiary of Hearthside Homes completed a sale of the 62 remaining finished lots at the Woodhaven project for $1.8 million and sold the four remaining model homes for approximately $500,000, thereby disposing of all remaining assets of the project. See Note 9 for additional discussion.

Other Comprehensive Income (Loss)

        Other comprehensive income (loss) items are transactions recorded in stockholders' equity during the year, excluding net income (loss) and transactions with stockholders. The components of other comprehensive loss are disclosed in the consolidated statements of income net of tax.

F-16

CALIFORNIA COASTAL COMMUNITIES, INC. AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 3—Significant Accounting Policies (Continued)

New Accounting Pronouncements

        In August 2009, the FASB issued Accounting Standards Update ("ASU") No. 2009-05 ("ASU 2009-05"), "Fair Value Measurements and Disclosures (Topic 820)—Measuring Liabilities at Fair Value," which provides guidance on measuring the fair value of liabilities under FASB ASC 820. ASU 2009-05 is effective for interim and annual periods beginning after August 28, 2009. The Company does not expect the adoption of ASU 2009-05 to have a material effect on its Consolidated Financial Statements.

        In June 2009, the FASB issued Statement of Financial Accounting Standards No. 168, "The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162" ("SFAS 168", or ASC 105), which establishes the FASB ASC as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with generally accepted accounting principles in the United States of America. SFAS 168 is effective for interim and annual reporting periods ending after September 15, 2009. The Company adopted SFAS 168 for the reporting period ended September 30, 2009. The adoption of SFAS 168 did not have a material effect on the Company's 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. At December 31, 2009, real estate inventories aggregated 366 lots and homes, including 17 model homes, eight standing inventory homes completed and unsold, two homes completed and in escrow, and seven homes under construction and in escrow. Real estate inventories at December 31, 2009 included $234.8 million recorded for 276 lots and homes under development and 17 model homes held under a financing lease at the Brightwater community as well as a five-acre project outside the Brightwater community, which are located on a mesa north of the Bolsa Chica wetlands in Huntington Beach, California. The additional recorded value in real estate inventories reflects the fair value of 73 lots at the Company's subsidiary's 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.

F-17

CALIFORNIA COASTAL COMMUNITIES, INC. AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 4—Real Estate Inventories (Continued)

        The Company recorded impairment charges during the years ended December 31, 2009 and 2008 as follows (in millions):

Project	Location	2009		2008
Huntington Beach	Huntington Beach	$	5.0	$	—
Inland Empire:
Hearthside Lane	Corona		—		24.1
Woodhaven	Beaumont		3.2		3.4
Alisal at Ontario	Ontario		—		0.6
Chandler Ranch	North Corona		—		0.1
	Subtotal—Inland Empire		3.2		28.2
Lancaster:
Lancaster II	Lancaster		3.5		—
Las Colinas	Lancaster		—		6.8
	Subtotal—Lancaster		3.5		6.8
	Total—All Projects	$	11.7	$	35.0

        During 2009, the Company recorded impairment charges aggregating $11.7 million, including $5.0 million and $3.5 million recorded during the fourth quarter related to a five-acre parcel in Huntington Beach and the Company's 73-lot Lancaster project, respectively, due to uncertainty about the projects' future cash flows as a result of the ongoing Chapter 11 Cases. Impairment charges during 2009 also included $3.2 million related to a subsidiary's Woodhaven project in Beaumont, California which was sold on September 30, 2009 in a transaction which extinguished the related project debt for less than 100% of the principal balance. The impairment charges were calculated based on market conditions and assumptions made by management that reflected current conditions at the time such impairment charges were determined, which may differ materially from actual results.

        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 Company's 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.

        On December 29, 2009, a subsidiary of Hearthside Homes, Inc. completed a sale of 54 finished lots for its Las Colinas project in Lancaster, California for $3.1 million. In addition, on September 30, 2009, a subsidiary of Hearthside Homes completed a sale of the remaining 62 finished lots and four model homes at the Woodhaven project in Beaumont, California for $2.3 million. See Note 9 for additional discussion.

        On March 31, 2009, a subsidiary of Hearthside Homes completed a deed-in-lieu transaction for the Hearthside Lane project in the City of Corona with the investor that had acquired the project loan secured by the property from IndyMac Federal Bank. The subsidiary conveyed the remaining 134 finished lots to the investor in exchange for a $28.7 million reduction in the note balance and retained seven homes which secured the then remaining note balance of $2.5 million. See Note 9 for additional discussion.

F-18

CALIFORNIA COASTAL COMMUNITIES, INC. AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 4—Real Estate Inventories (Continued)

        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):

	2009			2008
Capitalized interest, beginning of period	$	37.3		$	26.2
Interest incurred and capitalized		15.6			15.3
Charged to cost of sales		(9.1	)		(4.2	)
Charged to gain on debt restructuring		(7.0	)		—
Capitalized interest, end of period	$	36.8		$	37.3

Note 5—Investments in Unconsolidated Joint Ventures

        The Company's investments in unconsolidated joint ventures are 50% or less owned, not substantially controlled by the Company, and accordingly, are accounted for using the equity method and are not consolidated with the Company's Consolidated Financial Statements. Investments are included in the Company's balance sheet in other assets. Condensed combined financial information regarding the Company's investments in: (i) the Oxnard land development joint venture (for 2008 and 2007), (ii) a residential loan production partnership with a major commercial bank and (iii) a completed San Diego area homebuilding joint venture are summarized as follows (in millions):

	2009			2008			2007
Balance Sheet Data:
Total assets	$	0.2		$	0.3		$	9.7
Total liabilities		(0.2	)		(0.5	)		(1.0	)
Venturers' capital	$	—		$	(0.2	)	$	8.7
Statement of Operations Data:
Revenues	$	—		$	—		$	2.5
Expenses		—			(9.5	)		(1.8	)
Net income (loss)	$	—		$	(9.5	)	$	0.7

        The $9.5 million net loss in 2008 primarily reflects the write-off of the Oxnard joint venture's investment in its development project. During 2009, 2008 and 2007, the Company received approximately zero, $100,000 and $100,000, respectively, in aggregate cash distributions from the residential loan production partnership.

Note 6—Revolving Loan

        See Note 2 for a detailed discussion of the Company's default under the Revolving Loan and the status of the Chapter 11 Cases which commenced October 27, 2009.

        As of December 31, 2009 and 2008, $81.7 million and $74.4 million, respectively, was outstanding under the Revolving Loan at weighted average interest rates of 3.50% and 5.09%, respectively, based upon the Company's elected rates. The Company did not pay $1.7 million of principal due on

F-19

CALIFORNIA COASTAL COMMUNITIES, INC. AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 6—Revolving Loan (Continued)

September 30, 2009, and received a notice of event of default from KeyBank on October 1, 2009. In addition, the Company did not pay an additional $10.0 million due on December 31, 2009, resulting in an aggregate of $11.7 million of principal due and unpaid as of December 31, 2009. A major stockholder of the Company currently holds approximately 16% of the Revolving Loan.

        Outstanding advances bear interest based on the following loan-to-value grid:

Loan-to-Value	LIBOR Margin		Prime Margin
Greater than or equal to 30% to less than 40%		350		200
Greater than or equal to 20% to less than 30%		325		175
Less than 20%		300		150

        Interest on the facility is calculated on the average, outstanding daily balance and is paid monthly. Interest incurred on the Revolving Loan for the years ended December 31, 2009 and 2008 was $4.2 million and $4.7 million, respectively, at weighted-average interest rates of 3.63% and 5.10%, respectively. Following the Company's default in paying $1.7 million of principal when due, effective October 1, 2009, interest is incurred at the default rate stated in the loan; however, under the terms of the Bankruptcy Court's cash management order, the Company continued paying interest at the non-default rate of 3.50% and was current on such interest payments as of December 31, 2009.

        During March 2009, the Company exercised its option to extend the Revolving Loan maturity from September 15, 2009 to June 30, 2010. The Revolving Loan is subject to mandatory repayments and commitment reductions based on 40% of the $600,000 release price on the first 70 homes closed at the Brightwater project, and 40% of the $1 million release price per unit thereafter. As of September 30, 2009, the Company had delivered 70 homes. These mandatory repayments are applicable to the commitment reductions.

        During the year ended December 31, 2009, the Company delivered 31 homes at Brightwater and made mandatory repayments on the Revolving Loan of $5.1 million. As of December 31, 2009, the Company has delivered 80 homes, including the 17 model homes included in the sale-leaseback transaction completed on December 31, 2008, and made cumulative mandatory repayments for the Revolving Loan of $16.8 million. In addition, the Company has made additional repayments of $14.1 million. However, due to the Chapter 11 Filings, no principal payments were made on the 10 homes delivered during the fourth quarter of 2009. Availability under the Revolving Loan has been reduced to $70.0 million, however the principal balance as of December 31, 2009 is $81.7 million.

        As of December 31, 2009 and 2008, approximately $500,000 and $1.4 million, respectively, of deferred loan fees and closing costs related to the Revolving Loan are included in other assets and amortized over the life of the loan. Amortization of these costs is included in the capitalization of interest allocated to real estate inventories and charged to cost of sales when the related homes are delivered.

F-20

CALIFORNIA COASTAL COMMUNITIES, INC. AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 6—Revolving Loan (Continued)

        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 Company's 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 the Hearthside Lane project in Corona and the Las Colinas project in Lancaster and valuation allowances on deferred tax assets.

•

A loan-to-value ratio, which prohibits the Company's ratio of Revolving Loan debt outstanding to borrowing base value from exceeding a maximum ratio, regarding which the Company has been notified it is in default:

Reporting Period	Maximum Loan-to-Value Ratio
September 30, 2009 through March 30, 2010		35	%
March 31, 2010 and thereafter		30	%

•

A minimum consolidated tangible net worth covenant of $80 million, excluding impairment charges for the Hearthside Lane and Las Colinas projects and valuation allowances on deferred tax assets.

•

A prohibition on dividends.

        As of December 31, 2009, the Company's consolidated total liabilities are $216.5 million, tangible net worth after excluding the 2009 and 2008 inland impairment charges and valuation allowances on deferred tax assets is $106.9 million and the leverage ratio is 2.03. 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 mid-2009 by the agent for the Revolving Loan and Term Loan. The Company disputes the validity of that appraisal and has obtained its own appraisal.

        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 or December 31, 2009, and does not expect to be able to fully re-pay the Revolving Loan by its maturity date on June 30, 2010 from cash flow from operations. The Company is currently negotiating with its lenders to restructure the Revolving Loan and Term Loan through the court reorganization process to defer scheduled amortization payments in order to accommodate the expected sales pace of the Brightwater project and provide sufficient liquidity to fund construction and extend the maturity dates of the loans. 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 mortgage markets also present uncertainty as to the ability of the Company to achieve sufficient positive cash flow from operations required to satisfy its debt obligations.

F-21

CALIFORNIA COASTAL COMMUNITIES, INC. AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 7—Term Loan

        See Note 2 for detailed discussion of the Company's default under the Term Loan and the status of the Chapter 11 Cases which commenced October 27, 2009.

        On September 30, 2008, the Company entered into the third amendment to the five-year, $125 million Term Loan with KeyBank National Association, as a lender and as agent for the other loan syndicate members. The Term Loan is secured by a second trust deed on the Brightwater project, and a general pledge and assignment of the Company's ownership interests in all material subsidiaries. All existing material subsidiaries of the Company have provided full unconditional guarantees. The Term Loan includes financial covenants which may limit the amount that may be outstanding. A major stockholder of the Company currently holds approximately 19% of the Term Loan.

        As of December 31, 2009 and 2008, $99.8 million and $107.4 million, respectively, was outstanding under the Term Loan at interest rates of 4.25% and 6.38%, respectively, based upon the Company's elected rates. The outstanding balance currently bears interest based on the following loan-to-value grid:

Loan-to-Value	LIBOR Margin		Prime Margin
Greater than or equal to 65% to less than 70%		450		300
Greater than or equal to 50% to less than 65%		400		250
Less than 50%		350		200

        Interest on the facility is calculated on the average, outstanding daily balance and is paid monthly. Interest incurred on the Term Loan for the years ended December 31, 2009 and 2008 was $5.9 million and $8.0 million, respectively, at weighted-average interest rates of 4.51% and 5.97%, respectively. Following the Company's default in paying $1.7 million of principal on the Revolving Loan when due, effective October 1, 2009, interest is incurred at the default rate stated in the loan; however, under the terms of the Bankruptcy Court's cash management order, the Company continued paying interest at the non-default rate of 4.25% and was current on such interest payments as of December 31, 2009.

        The Term Loan is subject to mandatory repayments and commitment reductions based on 60% of the $600,000 release price on the first 70 units closed at the Brightwater project, and 60% of the $1 million release price per unit thereafter. As of September 30, 2009, the Company had delivered 70 homes. However, due to the Chapter 11 filing, no principal payments were made on the additional 10 homes delivered during the fourth quarter of 2009. These mandatory repayments are applicable to the commitment reductions.

        During the year ended December 31, 2009, the Company delivered 31 homes at Brightwater and made mandatory repayments on the Term Loan of $7.6 million. As of December 31, 2009, the Company has delivered 80 homes, including the 17 model homes included in the sale-leaseback transaction completed on December 31, 2008, and made cumulative mandatory repayments for the Term Loan of $25.2 million. Availability under the $125.0 million Term Loan has been reduced to $90.0 million, however the principal balance as of December 31, 2009 is $99.8 million.

        As of December 31, 2009 and 2008, approximately $1.9 million and $3.1 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

F-22

CALIFORNIA COASTAL COMMUNITIES, INC. AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 7—Term Loan (Continued)

interest allocated to real estate inventories, and charged to cost of sales when the related homes are delivered.

        Under the Term Loan, the Company is required to comply with a number of covenants, including the following financial covenants which the Company considers to be the most restrictive of all of the debt covenants:

•

A leverage covenant that prohibits the Company's 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 the Hearthside Lane project in Corona and the Las Colinas project in Lancaster and valuation allowances on deferred tax assets.

•

A loan-to-value ratio, which prohibits the Company's 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
Through December 30, 2009		70	%
December 31, 2009 through March 30, 2010		65	%
March 31, 2010 through September 29, 2010		60	%
September 30, 2010 and thereafter		45	%

•

An interest coverage covenant which prohibits the Company's ratio of EBITDA to interest incurred from being less than the following:

Period	Minimum Coverage Ratio
September 30, 2009 through December 30, 2009		1.50 to 1.00
December 31, 2009 and thereafter		2.00 to 1.00

•

A minimum consolidated tangible not 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 December 31, 2009, the Company's consolidated total liabilities are $216.5 million, tangible net worth after excluding the 2009 and 2008 inland impairment charges and valuation allowances on deferred tax assets is $106.9 million and the leverage ratio is 2.03. The Company is in compliance with the aforementioned covenants except for the loan-to-value covenant. 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 a recent appraisal obtained by the agent for the Revolving Loan and Term Loan. The Company disputes the validity of that appraisal and has obtained its own appraisal.

        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.

F-23

CALIFORNIA COASTAL COMMUNITIES, INC. AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 7—Term Loan (Continued)

The Company is currently negotiating with its lenders to restructure the Revolving Loan and Term Loan through the court reorganization process to defer scheduled amortization payments in order to accommodate the expected sales pace of the Brightwater project and provide sufficient liquidity to fund construction and extend the maturity dates of the loans. There can be no assurance that the Company will be successful in any of these endeavors. While the national credit markets appear to be improving, there is limited availability of financing for small business, which presents uncertainty as to the ability of the Company to secure additional financing, and the terms of such financing, if available. The current housing and mortgage markets also present uncertainty as to the ability of the Company to achieve sufficient positive cash flow from operations required to satisfy its debt obligations.

Note 8—Model 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 Company's 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 were due in 2009. The Company used an additional $10.7 million of the proceeds to reduce the balance outstanding under the Revolving Loan. See Notes 6 and 7 for additional discussion.

        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 subsidiary's 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. See Note 5.

        The model home lease allows the Company to utilize the 17 model homes for continued customer display for a term of three years expiring December 31, 2011, with two renewal options for one year each. As required by the lease agreement, the Company prepaid six months of rent totaling $1.6 million on December 31, 2008. Monthly lease payments of $262,500 per month are due through December

F-24

CALIFORNIA COASTAL COMMUNITIES, INC. AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 8—Model Home Financing (Continued)

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	$	3.2
2011		3.3
Total	$	6.5

Note 9—Other Project Debt

        In conjunction with the acquisition of single-family residential lots, the Company's homebuilding subsidiary, Hearthside Homes, Inc. and its subsidiaries, entered into construction loan agreements with commercial banks. These loan facilities financed a portion of land acquisitions and the majority of the construction of infrastructure and homes. During the year ended December 31, 2009, Hearthside Homes, Inc. and its subsidiaries repaid or settled all of its project debt loan facilities and did not enter into any new loan facilities.

        The following amounts were outstanding under these loan facilities as of December 31, 2009 and 2008 (in millions):

		Outstanding at December 31,
Project	Lender	2009		2008
Lancaster	IndyMac Federal Bank	$	—	$	2.7
Corona-Hellman	Third party investor(1)		—		29.2
Beaumont	Comerica Bank		—		7.0
		$	—	$	38.9

(1)

IndyMac Federal Bank sold the Corona-Hellman loan facility to a third party investor in December 2008.

        On December 29, 2009, a subsidiary of Hearthside Homes, Inc. completed a sale of 54 finished lots for its Las Colinas project in Lancaster, California for $3.1 million and repaid the principal amount of the related debt in full. As of December 31, 2009, the lender's claim for delinquent interest and related amounts aggregates approximately $500,000 and remains unresolved.

        On September 30, 2009 a subsidiary of Hearthside Homes completed a sale of four model homes and the remaining 62 finished lots for its Woodhaven project in Beaumont, California for $2.3 million. The lender for the loan secured by the project accepted the proceeds of the sale in full settlement of the loan without further recourse or obligation and the Company recognized a $4.1 million gain on

F-25

CALIFORNIA COASTAL COMMUNITIES, INC. AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 9—Other Project Debt (Continued)

debt cancellation. The transaction was accounted for in accordance with ASC 470-60, "Troubled Debt Restructurings by Debtors" and the gain was determined as follows (in millions):

Lot sale proceeds		$	1.8
Model home sale proceeds			0.5
Transaction costs			(0.2	)
	Net consideration		2.1
Debt balance at September 30, 2009			6.2
Gain on debt restructuring		$	(4.1	)

        On March 31, 2009, a subsidiary of Hearthside Homes, Inc. completed a deed-in-lieu transaction with a third party investor that acquired the Corona-Hellman loan facility ("Hellman Loan") from IndyMac Federal Bank in December 2008. As a result of this transaction, the Company recognized a pre-tax gain on debt restructuring of $20.7 million. The transaction was accounted for in accordance with ASC 470-60 and the gain was determined as follows (in millions):

Net book value of real estate inventories		$	6.2
Restricted cash assigned to investor			1.7
Transaction costs			0.1
	Total consideration		8.0
Debt balance at March 31, 2009			26.7
Accrued interest and property taxes			2.0
	Carrying amount of debt settled in full		28.7
Gain on debt restructuring		$	(20.7	)

        The subsidiary conveyed the remaining 134 finished lots to the investor in exchange for a $28.7 million reduction in the note balance and retained seven completed homes which secured the then remaining note balance of $2.5 million. The subsidiary also assigned $1.7 million of restricted cash related to the project to the investor as part of the transaction. During the year ended December 31, 2009, the Company delivered the remaining seven homes and repaid the related debt in full.

F-26

CALIFORNIA COASTAL COMMUNITIES, INC. AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 10—Other Liabilities (Not Subject to Compromise and Subject to Compromise)

        As of December 31, 2009 and 2008, other liabilities not subject to compromise and other liabilities subject to compromise were comprised of the following (in millions):

		Not Subject to Compromise
		2009		2008
Accrued pensions and benefits		$	—	$	5.9
Home warranty reserves			—		1.7
Contingent indemnity and environmental obligations			0.4		1.1
Capital contribution due to joint venture (see Note 5)			—		0.5
Unamortized discount			—		(0.4	)
	Total other liabilities not subject to compromise	$	0.4	$	8.8

		Subject to Compromise
		2009			2008
Accrued pensions and benefits		$	5.5		$	—
Home warranty reserves			1.9			—
Contingent indemnity and environmental obligations			0.7			—
Capital contribution due to joint venture (see Note 5)			0.5			—
Unamortized discount			(0.3	)		—
	Total other liabilities subject to compromise	$	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 Company's 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 Company's employees or contractors. The home warranty reserve activity is presented below for the years ended December 31 (in millions):

	2009		2008
Balance at beginning of period	$	1.7	$	2.3
Provision		0.2		0.3
Adjustment due to change in estimate		—		(0.5	)
Payments		—		(0.4	)
Balance at end of period	$	1.9	$	1.7

F-27

CALIFORNIA COASTAL COMMUNITIES, INC. AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 11—Income Taxes

        The following is a summary of the income tax provision (benefit) applicable to income before income taxes for the years ended December 31 (in millions):

	2009		2008			2007
Current taxes	$	—	$	0.1		$	—
Deferred taxes		4.9		(15.0	)		(13.0	)
Valuation allowances on deferred tax assets		31.1		23.2			—
	$	36.0	$	8.3		$	(13.0	)

        The principal items accounting for the difference in taxes on income computed at the statutory rate and as recorded, are as follows for the years ended December 31 (in millions):

	2009		2008			2007
(Benefit) provision for income taxes at statutory rate	$	4.8	$	(12.8	)	$	(11.2	)
State income taxes, net		2.2		(2.1	)		(1.8	)
Valuation allowances on federal deferred tax assets		29.0		23.2			—
	$	36.0	$	8.3		$	(13.0	)

        The tax effects of items that gave rise to significant portions of the deferred tax accounts for the years ended December 31 (in millions) are as follows:

		2009			2008
Deferred tax assets:
	Accruals/reserves not deductible until paid	$	3.8		$	6.0
	Real estate inventory impairment and other		3.9			27.6
	Other deferred assets		0.3			(1.4	)
	Net operating loss and alternative minimum tax credit carryforwards		58.0			44.4
	Valuation allowances on deferred tax assets		(49.9	)		(22.5	)
			16.1			54.1
Deferred tax liabilities:
	Real estate inventories (principally due to accounting for a business combination, partially offset by asset revaluations in 1995 and 1997)		16.1			17.0
Net deferred tax assets		$	—		$	37.1

        During 2009, 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. The Company concluded that it was not "more likely than not" that the Company would be able to generate sufficient projected taxable income in future years. Additionally, there are critical uncertainties as to whether the Company will be able to

F-28

CALIFORNIA COASTAL COMMUNITIES, INC. AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 11—Income Taxes (Continued)

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.

        For the years ended December 31, 2009 and 2008, valuation allowances on federal deferred tax assets were $29.0 million and $23.2 million, respectively. As of December 31, 2009 and 2008, $3.8 million and $700,000, respectively, of NOLs expired unused resulting in a net change in federal valuation allowances of $25.2 million and $22.5 million for 2009 and 2008, respectively.

        While the Company reported profitable operations before income taxes for 2009, it reported a taxable loss due to tax losses realized upon dispositions of inland properties. These tax losses were previously recognized for financial statement purposes when impairment losses were recorded. The Company monitors the availability of real estate for development at economically viable prices, market conditions and other objectively verifiable economic factors affecting the Company's operations, as well as other positive and negative factors, as it assesses valuation allowances against its deferred tax assets.

        During the fourth quarter of 2009, the Company recorded a $950,000 tax receivable related to the November 6, 2009 passage of the Worker, Homeownership and Business Assistance Act of 2009 which allows businesses with NOLs for 2008 and 2009 to carry back losses for up to five years and suspends the 90% limitation on the use of any alternative tax NOL deduction attributable to carrybacks of the applicable NOL. The Company expects to file a refund claim for federal alternative minimum tax paid for years prior to 2009 and anticipates receiving the refund during 2010.

        The federal NOLs available as of December 31, 2009 were approximately $163 million. The amount of federal NOLs which expire if not utilized is $49 million in 2010, $42 million in 2011, zero in 2012, 2013, and 2014 and $72 million thereafter.

        The Internal Revenue Code (the "Code") generally limits the availability of NOLs if an ownership change occurs within any three-year period under Section 382. If the Company were to experience an ownership change of more than 50%, the use of all remaining NOLs would generally be subject to an annual limitation equal to the value of the Company's equity before the ownership change, multiplied by the long-term tax-exempt rate (4.03% as of March 2010) plus (ii) recognized built-in-gains, defined as those gains recognized within five years of the ownership change subject to an overall limitation of the net unrealized built-in gains existing as of the ownership change date. The Company estimates that after giving effect to various transactions by stockholders who hold a 5% or greater interest in the Company, it has experienced a three-year cumulative ownership shift of approximately 29% as of March 29, 2010, as computed in accordance with Section 382. While the Company's net deferred tax assets are currently fully reserved due to the uncertainty of the timing and amount of future taxable income, if the Company generates taxable income in future periods, reversal of all or a portion of the valuation allowance could have a significant positive impact on net income in the period that it becomes more likely than not that the deferred tax assets will be utilized. In the event of an ownership change, the Company's use of the NOLs may be limited and not fully available for realization.

        In September 2006, the Company's Board of Directors suspended enforcement of the Company's charter documents that restrict stockholders from acquiring more than 5% of the outstanding shares of Common Stock. The Board determined that such restrictions were not currently required to preserve the tax benefits of the Company's $163 million of NOLs. While the Company remains subject to Code section 382, which limits the availability of NOLs in the event of an ownership change, the Company

F-29

CALIFORNIA COASTAL COMMUNITIES, INC. AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 11—Income Taxes (Continued)

would have five years from the date of any such ownership change to recognize its built in gains and utilize its NOLs. However, the Board may reinstitute the 5% ownership limitation if required by currently unanticipated events.

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.

        A reconciliation of the beginning and ending balances of the gross amount of unrecognized tax benefits is as follows:

		2009			2008
Balance at beginning of year		$	5.1		$	5.1
	Reductions due to lapse of statute of limitations		(0.2	)		—
Balance at end of year		$	4.9		$	5.1

        Of the Company's unrecognized tax benefits of $4.9 million at December 31, 2009, $100,000 would decrease the Company's effective tax rate if recognized. The Company expects that its unrecognized tax benefits will decrease by approximately $1.5 million within twelve months of the reporting date due to statute of limitations lapses.

        The Company recognizes interest expense and penalties related to uncertain tax positions as interest or other expense. As of December 31, 2009, 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 Company's only tax jurisdictions. The years 2006 through 2009 and the years 2005 through 2009 remain open for Federal and California purposes, respectively, for which the Company utilized NOLs generated between 1990 and 1993 to offset taxable income. If uncertainties resulting in valuation allowances can be favorably resolved, the Company expects to utilize Federal NOLs generated in 1994 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.

F-30

CALIFORNIA COASTAL COMMUNITIES, INC. AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 12—Commitments and Contingencies

Real Estate Matters

        The Company is subject to the usual obligations associated with entering into contracts for the purchase of land and improved home sites. The purchase of properties under these contracts is generally contingent upon satisfaction of certain requirements by the sellers, including obtaining applicable property entitlements. The Company also utilizes option contracts with third-party land sellers and financial entities as a method of acquiring land in staged takedowns and minimizing the use of funds from other corporate financing sources. These option contracts also help to manage the financial and market risk associated with land holdings. Option contracts generally require the payment of a non-refundable cash deposit of 5% to 15% of the purchase price for the right to acquire lots over a specified period of time (usually one to two years) at predetermined prices. The Company has the right at its discretion to terminate its obligations under these land purchase and option agreements by forfeiting the cash deposit with no further financial responsibility. As of December 31, 2009, the Company has no land option deposits.

        The Company has outstanding performance and surety bonds, for the benefit of city and county jurisdictions, related principally to its obligations for site improvements and fees at various projects at December 31, 2009. 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 Company's financial position, results of operations or cash flows.

Legal Proceedings

Chapter 11 Cases

        See Note 2—Chapter 11 Proceedings and Plans of Management.

Other Litigation

        There are various lawsuits and claims pending against the Company and certain subsidiaries. In the opinion of the Company's management, ultimate liability, if any, will not have a material adverse effect on the Company's financial condition or results of operations.

California Department of Toxic Substances Control

        In October 2006, the California Department of Toxic Substances Control ("DTSC") filed a civil complaint against the Company's Hearthside Residential Corp. subsidiary ("HRC") in the Federal District Court for the Southern Division of the Central District of California The DTSC's 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. HRC's 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 attorney's fees.

F-31

CALIFORNIA COASTAL COMMUNITIES, INC. AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 12—Commitments and Contingencies (Continued)

        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 Company's subsidiary is vigorously defending itself in this matter. Therefore, the Company has not accrued for any of DTSC's approximately $1.0 million of claims related to these residential properties.

        Prior to the commencement of the trial that was scheduled for December 2, 2008, the District Court ruled that HRC can be held liable as a "current owner" of the site under applicable law. HRC applied to have that ruling certified for appeal. In March 2009, the District Court granted permission to hear HRC's appeal and the appellate process commenced. The Company is currently awaiting a hearing date for oral arguments to be heard. HRC currently expects that it could take two to four months to complete the appellate process. There can be no assurance that HRC will receive a favorable ruling that it is not deemed to be a current owner of the site. Once the appellate process is complete, the parties will return to the District Court within 30 to 60 days to commence a trial.

        See Note 10 for a discussion of other contingencies.

Lease Obligations

        For the years ended December 31, 2009, 2008, and 2007, the Company incurred rents for corporate facilities of approximately $351,000, $335,000, and $289,000, respectively. Future minimum noncancelable operating lease payments for the years ending December 31, 2010 and 2011 are approximately $353,000 and $367,000, respectively. Thereafter, such amounts are zero.

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 Company's current operations. By operation of law or contractual indemnity provisions, the Company may have retained liabilities relating to certain of these assets and businesses. 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 Company's previously affiliated companies. The Company believes its consolidated balance sheet reflects adequate reserves for these matters

Note 13—Retirement Plans

        The Company sponsors a retirement savings plan pursuant to Section 401(k) of the Code, and participants may contribute a portion of their compensation to their respective retirement accounts, in an amount not to exceed the maximum allowed under the Code. The plan provides for certain matching contributions paid in cash by the Company to non-highly compensated employees, as defined in the Code. Plan participants are immediately vested in their own contributions, while Company

F-32

CALIFORNIA COASTAL COMMUNITIES, INC. AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 13—Retirement Plans (Continued)

contributions vest over a 6-year period. For the years ended December 31, 2009, 2008, and 2007, the Company's contributions to the 401(k) plan were not material.

        The Company has a noncontributory defined benefit retirement plan which covered substantially all employees of the Company prior to September 30, 1993 who had completed one year of continuous employment. The benefit accrual for all participants was terminated on December 31, 1993. Net periodic pension cost was as follows for the years ended December 31 (in millions):

	2009			2008			2007
Service cost	$	—		$	—		$	—
Interest cost		0.3			0.3			0.3
Expected return on assets		(0.1	)		(0.3	)		(0.3	)
Net amortization and deferral		0.2			0.1			0.1
Net periodic pension expense	$	0.4		$	0.1		$	0.1

        The Company estimates that net periodic pension expense for 2010 will be approximately $300,000.

        The development of the projected benefit obligation for the plan at December 31, 2009 and 2008 is based on the following assumptions:

	2009			2008
Measurement date		12/31/09			12/31/08
Discount rate		5.50	%		6.35	%
Expected long-term rate of return		8.00	%		8.00	%

        During 2009, the assumption regarding long-term return on plan assets was 8%, unchanged from the prior year. The Company considers both historical and expected long-term rates, taking into account current and recent market conditions, to determine its assumption. While the Company gives appropriate consideration to recent performance, the Company's assumption regarding long-term rate of return represents a long-term perspective.

Plan asset information:

	Target Allocation 2010			Allocation 2009			Allocation 2008
Equity securities		69	%		98	%		99	%
Debt securities		30	%		0	%		0	%
Cash		1	%		2	%		1	%

F-33

CALIFORNIA COASTAL COMMUNITIES, INC. AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 13—Retirement Plans (Continued)

        The funded status and accrued pension cost at December 31, 2009 and 2008 for the defined benefit retirement plan were as follows (in millions):

	2009			2008
Benefit obligation:
Benefit obligation at beginning of year	$	5.9		$	5.9
Service cost		—			—
Interest cost		0.3			0.3
Actuarial loss		0.2			0.3
Change in assumptions		—			—
Benefits paid		(0.5	)		(0.5	)
Administrative expenses paid		(0.1	)		(0.1	)
Benefit obligation at end of year	$	5.8		$	5.9
Plan assets:
Fair value of plan assets at end of prior year	$	2.2		$	4.4
Net return (loss) on plan assets		0.5			(1.8	)
Assets contributed to plan		0.3			0.2
Benefits paid		(0.5	)		(0.5	)
Administrative expenses paid		(0.1	)		(0.1	)
Fair value of plan assets at end of year	$	2.4		$	2.2
Funded status	$	(3.4	)	$	(3.7	)
Unrecognized net actuarial loss		4.3			4.7
Prepaid benefit cost		0.9			1.0
Additional minimum liability charged to other comprehensive loss		(4.3	)		(4.7	)
Accrued benefit liability	$	(3.4	)	$	(3.7	)

        The Company estimates that benefit payments will be approximately $500,000 for each of the next five years, and an aggregate of $2.3 million for the five fiscal years thereafter. The Company is required to contribute approximately $700,000 to the plan in 2010.

        The $2.6 million and $2.8 million balance of accumulated other comprehensive loss as of December 31, 2009 and 2008, respectively, reflects the additional minimum liability of $4.3 million and $4.7 million, respectively, net of prepaid pension costs. The amount of the accrued benefit liability is reflected in other liabilities.

Note 14—Stockholders' Equity

Common Stock

        During October 1999, pursuant to an unsolicited written consent from a majority of the Company's stockholders, the Company adopted certain amendments to its certificate of incorporation. The amendments authorized 18,000,000 shares of a second class of stock, ("Excess Stock") to be issued

F-34

CALIFORNIA COASTAL COMMUNITIES, INC. AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 14—Stockholders' Equity (Continued)

under certain circumstances. The effect of the amendments is to prohibit the acquisition of the Company's Common Stock by anyone who would become a 5% stockholder or by existing 5% stockholders, except in certain permissible circumstances which would not significantly increase the risk of an Ownership Change (as defined by the Internal Revenue Code of 1986, as amended) and would not, therefore, jeopardize the Company's ability to use its $163 million of NOLs (see Note 11). While the Company's net deferred tax assets are currently fully reserved due to the uncertainty of the timing and amount of future taxable income, if the Company generates taxable income in future periods, reversal of all or a portion of the valuation allowance could have a significant positive impact on net income in the period that it becomes more likely than not that the deferred tax assets will be utilized. While these amendments reduced the Company's risk of an Ownership Change occurring due to the acquisition of shares by 5% stockholders, the risk remains that an Ownership Change could result from the sale of shares by existing 5% stockholders. The Company's Board of Directors evaluates requests to purchase any amounts in excess of 5% of the Company's common stock and authorizes such transactions which are not expected to jeopardize the Company's ability to use its NOLs.

        On September 18, 2006, the Company's Board of Directors suspended enforcement of the Company's charter documents that restrict stockholders from acquiring more than 5% of the outstanding shares of Common Stock. The Board determined that such restrictions were not currently required to preserve the tax benefits of the Company's $163 million of NOLs. While the Company remains subject to the Internal Revenue Code's section 382, which limits the availability of NOLs in the event of an ownership change, the Company would have five years from the date of any such ownership change to recognize its built in gains and utilize its NOLs. The Board may reinstitute the 5% ownership limitation if currently unanticipated events so require.

        At the May 2000 Annual Meeting, the Company's shareholders approved a reduction in authorized shares of both Common Stock and Excess Stock from 18,000,000 shares to 11,000,000 shares. At the May 2004 Annual Meeting, the Company's shareholders approved an increase in authorized shares of both Common and Excess Stock from 11,000,000 shares to 13,500,000 shares.

        On January 1, 2007, the Company adopted ASC 740-10 as it applies to uncertain tax positions, as described in Note 10. This adoption 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.

Note 15—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 Company's fully diluted equity, for certain directors and officers. At the May 2004 and June 2006

F-35

CALIFORNIA COASTAL COMMUNITIES, INC. AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 15—Stock Plan (Continued)

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.

        In January 2009 and 2008, the Company issued a total of 125,000 shares and 15,817 shares, respectively, of its common stock to three independent directors in 2009 and four independent directors in 2008, under the Director Fee Program, which is a component of the 1993 Plan. These restricted shares vested at a rate of 25% per quarter during 2008 and 2009, respectively. On October 16, 2008, one of the Company's independent directors resigned from the Board and forfeited 878 unvested restricted shares.

        The Company did not grant any options during 2009, 2008, or 2007. Pursuant to ASC 718-10, "Compensation—Stock Compensation," the Company recorded $70,000, 96,000, and $123,000 of compensation expense during the years ended December 31, 2009, 2008 and 2007, respectively, which is reflected in additional paid-in capital.

        A summary of the status of the Company's 1993 plan for the years ended December 31, 2009, 2008 and 2007 follows:

	2009							2008							2007
	Number of Options			Weighted- Average Exercise Price			Weighted- Average Remaining Life	Number of Options			Weighted- Average Exercise Price			Weighted- Average Remaining Life	Number of Options			Weighted- Average Exercise Price			Weighted- Average Remaining Life
Outstanding, January 1		17,500		$	21.58	(a)			17,500		$	21.58	(a)			17,500		$	21.58	(a)
Granted		—		$	—				—		$	—				—		$	—
Exercised		(—	)	$	—				(—	)	$	—				(—	)	$	—
Outstanding, December 31		17,500		$	21.58	(a)	6.1 years		17,500		$	21.58	(a)	7.1 years		17,500		$	21.58	(a)	8.1 years
Fully vested and exercisable at December 31		17,500		$	21.58	(a)	6.1 years		17,500		$	21.58	(a)	7.1 years		12,500		$	21.37	(a)	7.9 years
Available for future grants at December 31		221,794							346,794							361,733

(a)

Adjusted for special dividend of $12.50

        As of December 31, 2009, 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 6.1 years. All outstanding stock options are fully vested. The aggregate intrinsic value of all outstanding, fully-vested and exercisable stock options at December 31, 2009 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 option's expected term and the estimated future price volatility of the underlying stock, which determine the fair value of the share-based awards. The Company's estimate of expected term is determined based on the weighted-average period of time that options granted are

F-36

CALIFORNIA COASTAL COMMUNITIES, INC. AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 15—Stock Plan (Continued)

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 Company's stock. 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 Company's stock options.

Note 16—Unaudited Quarterly Financial Information

        The following is a summary of quarterly financial information for 2009 and 2008 (in millions, except per share amounts):

		First			Second			Third			Fourth			Full Year
2009
Revenues		$	12.8		$	10.5		$	11.4		$	12.5		$	47.2
Cost of sales(a)			12.0			8.6			9.8			19.0			49.4
Gross operating profit (loss)			0.8			1.9			1.6			(6.5	)		(2.2	)
Net income (loss)(b)			11.2			(7.3	)		(18.1	)		(8.2	)		(22.4	)
Other comprehensive income			—			—			—			0.3			0.3
Earnings (loss) per common share—basic and diluted		$	1.02		$	(.66	)	$	(1.65	)	$	(.75	)	$	(2.04	)
Weighted-average common shares outstanding:
	Basic and diluted		11.0			11.0			11.0			11.0			11.0
2008
Revenues		$	5.0		$	10.4		$	13.9		$	16.7		$	46.0
Cost of sales(c)			3.9			13.2			39.7			11.9			68.7
Gross operating profit (loss)			1.1			(2.8	)		(25.8	)		4.8			(22.7	)
Net loss (d)			(0.7	)		(3.1	)		(21.1	)		(19.8	)		(44.7	)
Other comprehensive loss			—			—			—			(1.4	)		(1.4
Loss per common share—basic and diluted		$	(0.06	)	$	(0.28	)	$	(1.94	)	$	(1.82	)	$	(4.10	)
Weighted-average common shares outstanding:
	Basic and diluted		10.9			10.9			10.9			10.9			10.9

(a)

Cost of sales includes impairment charges of $3.2 million and $8.5 million for the first quarter and fourth quarter, respectively.

(b)

Net loss for the 2009 periods includes valuation allowances for deferred tax assets of $7.6 million, $20.6 million, and $2.9 million for the second, third, and fourth quarters, respectively.

(c)

Cost of sales includes impairment charges of $5.0 million, $29.1 million and $900,000 for the second, third and fourth quarters of 2008, respectively.

(c)

Net loss for the 2008 periods includes $4.6 million of joint venture investment losses in the fourth quarter and valuation allowances for deferred tax assets of $4.5 million and $18.7 million for the third quarter and fourth quarter, respectively.

F-37

EX-10.04

Exhibit 10.04

THE CALIFORNIA COASTAL COMMUNITIES, INC.

RETIREMENT PLAN

Generally Effective January 1, 2009

(Amended and Restated through December 31, 2009)

TABLE OF CONTENTS

	Page
ARTICLE I DEFINITIONS	3
ARTICLE II ELIGIBILITY	18
ARTICLE III RETIREMENT, TERMINATION, OR DEATH	20
ARTICLE IV FUNDING OF BENEFITS	36
ARTICLE V TRUST AGREEMENT AND TRUST FUND	37
ARTICLE VI CERTAIN LIMITATIONS ON BENEFITS	37
ARTICLE VII PLAN ADMINISTRATION	38
ARTICLE VIII AMENDMENT AND TERMINATION; PARTICIPATION AND WITHDRAWAL BY COMPANIES; PLAN MERGERS	42
ARTICLE IX TOP-HEAVY PROVISIONS	45
ARTICLE X GENERAL PROVISIONS	45
ARTICLE XI SPECIAL PROVISIONS RELATING TO THE CUTBACK OF OPERATIONS AT THE HAMPTON LOCATION	49
ARTICLE XII SPECIAL PROVISIONS RELATING TO THE CUTBACK OF OPERATIONS AT THE LA JOLLA LOCATION	51
ARTICLE XIII ADDITIONAL SPECIAL RULES	52
ARTICLE XIV SPECIAL PROVISIONS RELATING TO FORMER PARTICIPANTS IN THE ENGINEERING RESEARCH, INCORPORATED RETIREMENT PLAN FOR SALARIED EMPLOYEES AND THE ENGINEERING RESEARCH, INC. HOURLY EMPLOYEES PENSION PLAN	55
ARTICLE XV SPECIAL VESTING RULES IN CONNECTION WITH CORPORATE OFFICE SHUTDOWN AND COMPANY STREAMLINING	76
APPENDIX I LIMITATIONS ON BENEFITS	I-1
APPENDIX II DISTRIBUTION PROVISIONS	II-1
APPENDIX III TOP HEAVY PROVISIONS	III-1

i

THE CALIFORNIA COASTAL COMMUNITIES, INC.

RETIREMENT PLAN

Effective December 31, 1993, the name of the Bolsa Chica Company Retirement Plan was officially changed to the Koll Real Estate Group Retirement Plan (the “Plan”) and Plan benefits were frozen.(1)  Effective January 1, 1999 the Plan was renamed The California Coastal Communities, Inc. Retirement Plan.  The Plan has been amended to incorporate certain required changes, but benefit accruals under this Plan remain frozen.

The Bolsa Chica Company Retirement Plan (formerly known as The Henley Properties Inc. Retirement Plan and, prior to January 1, 1990, known as The Henley Group, Inc. Retirement Plan) was originally adopted, effective June 1, 1986.

In connection with the change of the corporate name of Henley Properties Inc. to The Bolsa Chica Company and the merger (the “1992 Merger”) of HP Merger Co., a wholly owned subsidiary of The Bolsa Chica Company (known prior to the 1992 Merger as Henley Properties Inc.), with and into The Henley Group, Inc., the name of the Plan was changed to The Bolsa Chica Company Retirement Plan.

The Henley Group, Inc. Retirement Plan was adopted as a pension plan for the benefit of the employees of The Henley Group, Inc., a Delaware corporation, effective June 1, 1986, by a resolution of Henley’s Board of Directors, as a continuation of the Predecessor Plan.  In connection with the distribution as of December 31, 1989 to shareholders of the Company of the stock of a subsidiary of the Company, the Plan was divided into two Plans, the Company was renamed Henley Properties Inc. and, effective January 1, 1990, the Plan became known as The Henley Properties Inc. Retirement Plan.

The Plan was adopted as a continuation of and successor to The Signal Companies, Inc. Retirement Plan (the “Signal Retirement Plan” or “Predecessor Plan”) for individuals

(i)who

(A)were actively employed on January 1, 1986 by The Henley Group, Inc. (“Henley”) or a business that became a subsidiary or division of Henley in connection with the distribution by Allied-Signal Inc. (“Allied-Signal”) to the owners of its common stock of all of the shares of Henley common stock as of May 27, 1986 (the “Spinoff”); or

(1)Effective September 30, 1993, The Bolsa Chica Company changed its name to Koll Real Estate Group, Inc.  Consequently, as of September 30, 1993, all references in this document to the Bolsa Chica Company should be read as references to the Koll Real Estate Group, Inc.  Effective January 1, 1999 all references to the Bolsa Chica Company and to Koll Real Estate Group, Inc. should be read as references to California Coastal Communities, Inc.

1

(B)were actively employed on January 1, 1986 by a member of the Allied-Signal controlled group of corporations and became Employees in connection with the Spinoff; and

(ii)who participated or were eligible to participate in the Predecessor Plan on December 31, 1985,

subject to a transfer of all assets allocable to such individuals to the Plan from the Predecessor Plan.  Benefits payable under this Plan shall not duplicate benefits payable under the Predecessor Plan.

The Plan is intended to be tax-exempt and qualified under the provisions of Section 401 and other applicable provisions of the Internal Revenue Code of 1986, as amended.

Pursuant to Notice 88-131, the Plan was amended to limit compensation for purposes of computing accrued benefits under the Plan to $200,000 as of January 1, 1989 (Model Amendment 1), and to prohibit the additional accrual of benefits for highly compensated participants after May 1, 1989 (Model Amendment 2).

The Plan was amended and restated to comply with the Tax Reform Act of 1986 and Section 401(a)(4) of the Internal Revenue Code as of January 1, 1989.  The accrued benefit of highly compensated participants has been retroactively adjusted to reflect the accrual of benefits after May 1, 1989 in accordance with the terms of this Amended and Restated plan.

The Plan was also amended and restated effective January 1, 1990 in connection with the corporate reorganization described above and to make certain other changes.  The Plan was again amended and restated effective August 1, 1992 and again as of the dates indicated in this document to reflect the name changes described above and to make certain other changes.

Subject to Notice 88-131, the rights and obligations of each person covered by the Plan who retires or whose employment otherwise terminates prior to the effective date of any amendment or restatement shall be determined in accordance with the Plan as in effect as of the date of his retirement or termination as the case may be.

Effective December 31, 1993, benefit accruals under this Plan were frozen.

This Plan document contains changes requested by the Internal Revenue Service in April and May of 1996 as part of the determination letter process.  The Plan document also contains changes made as part of the IRS determination letter process in 2001, including incorporation into this amended and restated Plan document of Amendment No. 1, which was executed on December 14, 1999.

Effective January 1, 2009, unless otherwise indicated, this document constitutes an amendment and restatement of the Plan.  Unless specifically provided to the contrary in this document, the rights and benefits of a Plan Participant who ceased to be an Employee before January 1, 2009 will be determined in accordance with the terms of the Plan on the date on which that Participant ceased to be an Employee, and in accordance with any provisions of the Plan that are specifically made effective to that date.

2

ARTICLE I

DEFINITIONS

Section 1.1General.  Whenever the following terms are used in the Plan with the first letter capitalized, they shall have the meaning specified below unless the context clearly indicates to the contrary.

Section 1.2Accrued Benefit.  An Employee’s “Accrued Benefit” as of his Separation from the Service shall have the meaning given in Section 3.10.

Section 1.3Actuarial Equivalent including Definition of Applicable Interest Rate and Applicable Mortality Table.  “Actuarial Equivalent” shall mean the equivalent of a given benefit, or a given amount, payable in another manner.  Determination of a Participant’s vested accrued benefit for purposes other than a lump sum payment shall be based on an interest rate of 7.5% and mortality specified in the 1984 Unisex Pension Table.

In the case of a Participant who has not reached his Early Retirement Date and who has elected to receive a Disability Retirement Benefit under Section 3.5, the ages in the table specified above will be set forward 5 years in the calculation of the Disability Retirement Benefit of such Participant.

For purposes of determining (i) whether the present value of a Participant’s accrued benefit exceeds $5,000 for purposes of Section 3.13 and (ii) the amount of a lump sum benefit, the Actuarial Equivalent shall be calculated using the Applicable Interest Rate under Section 417(e) of the Code for the second full calendar month before the date of distribution, and the Applicable Mortality Table under Section 417(e) of the Code.

Notwithstanding any other provision of the Plan to the contrary, the present value of the accrued lump sum retirement benefit due an Employee who became a Participant prior to January 1, 2000 shall not be less than the present value of such Participant’s vested accrued benefit as of December 31, 1999 utilizing an interest rate that is equal to 7.5% (provided the interest rate used shall be no greater than the immediate or deferred rate, in effect as of the first day of each Plan Year, whichever is appropriate, used by the Pension Benefit Guaranty Corporation to determine the present value of a lump sum distribution upon plan termination) and mortality table specified above for purposes other than a lump sum payment.

Section 1.4Administrator or Administrative Committee.  “Administrator” or “Administrative Committee” shall mean the Bolsa Chica Administrative Committee, appointed in accordance with Article VII.  Effective September 30, 1993, “Administrator” or “Administrative Committee” means Koll Real Estate Group, Inc., and any officer of Koll Real Estate Group, Inc. is authorized to act on behalf of the Administrator or the Administrative Committee.

Section 1.5Aggregate Group.  “Aggregate Group” shall mean the plan or plans required to be considered with this Plan for purposes of satisfying the requirements of Section 401(a)(4) and Section 410 of the Code.

3

Section 1.6Anniversary Date.  “Anniversary Date” of a Participant shall mean the anniversary of the date on which he became an Employee for the first time or after a Severance from Service Date.

Section 1.7Average Final Compensation.  “Average Final Compensation” of a Participant shall mean his average monthly Compensation during the highest sixty consecutive full calendar months during which he received Compensation as an Employee in his last one hundred twenty such months.  If he has less than one hundred twenty such months there shall be substituted the number of such months he has accumulated.  For purposes of determining consecutiveness, calendar months other than full calendar months during which he received Compensation as an Employee shall be ignored.  Subject to Section 1.16(g), Compensation for any twelve-month period included in the calculation of Average Final Compensation shall not exceed $200,000, adjusted for changes in the cost of living as provided in Section 415(d) of the Code.

Effective December 31, 1993, the Average Final Compensation of a Participant shall be calculated for a consecutive monthly period under Section 1.7 of the Plan ending no later than December 31, 1993, and no Compensation paid or earned after December 31, 1993 shall be taken into account.  Accordingly, the Average Final Compensation of each Participant shall be a fixed dollar amount as of December 31, 1993 which shall not be subsequently adjusted for any Compensation earned or paid after December 31, 1993.

Section 1.8Beneficiary.  “Beneficiary” shall mean a person properly designated by a Participant or Former Participant in accordance with the Plan and the rules, if any, promulgated by the Administrator, to receive Benefits, solely in accordance with Section 3.6, 3.7 or 3.9, in the event of the death of the Participant or Former Participant.  The Plan will not honor waivers or disclaimers of Plan benefits; provided, however, that the Plan will dispose of a Participant’s benefit as though a Beneficiary predeceased the Participant if the Administrative Committee receives from that Beneficiary, no earlier than the day after the Participant’s death and no later than nine (9) months after the Participant’s death a disclaimer that purports to satisfy the requirements of Code Section 2518.

Section 1.9Benefit.  The “Benefit” of a Participant shall mean a payment payable at the times and over the applicable period specified in Article III.

Section 1.10Board of Directors.  “Board of Directors” shall mean the Board of Directors or the Executive Committee of the Board of Directors of Bolsa Chica.  Effective September 30, 1993, “Board of Directors” shall mean the Board of Directors of Koll Real Estate Group, Inc.

Section 1.11Bolsa Chica.  “Bolsa Chica” shall mean The Bolsa Chica Company, a Delaware corporation, formerly known as Henley Properties Inc.  Effective September 30, 1993, Bolsa Chica became Koll Real Estate Group, Inc. and, effective September 30, 1993 all references in this Plan to Bolsa Chica should be read as references to Koll Real Estate Group, Inc.   Effective January 1, 1999, all references in this Plan to Bolsa Chica should be read as references to California Coastal Communities, Inc.

4

Section 1.12Code.  “Code” shall mean the Internal Revenue Code of 1986, as amended.  All citations to sections of the Code are to such sections as they may from time to time be amended or renumbered.

Section 1.13Commissioner.  “Commissioner” means the Commissioner of the Internal Revenue Service.

Section 1.14Committee.  “Committee” shall mean the Administrator or Administrative Committee.

Section 1.15Company; Companies.  As the context requires, “Company” or “Companies” shall mean Bolsa Chica (as defined in Section 1.11), any corporation which adopts the Plan as a whole or as to one or more divisions or classifications in accordance with Section 8.4, and any successor corporation which continues the Plan under Section 8.9, acting through their respective officers.

Section 1.16Compensation.

(a)“Compensation” of a Participant for any Plan Year shall mean

(i)his fixed, basic and regularly recurring straight-time pay which for purposes of this Plan shall include the amount, if any, by which such pay was voluntarily reduced in accordance with a qualified cash or deferred arrangement under a qualified savings or thrift plan of any of the Companies,

(ii)any additional shift differential pay,

(iii)all amounts which an Employee on sick leave would have received as his fixed, basic and regular recurring straight-time pay had he not collected sick leave pay during such leave (but excluding any statutory benefits or insured benefits),

(iv)payment for overtime hours,

(v)commissions or sales, production or nonincentive bonus payments, and

(vi)except as provided in subsection, any annual year-end bonus or incentive compensation award attributable to such Plan Year (whether or not paid within such Plan Year and whether paid in cash or in securities), expressed as an average monthly rate of pay for the entire Plan Year.  For purposes of computing such average monthly rate of pay, a Participant’s Compensation for an entire Plan Year shall be divided by the number of months in such Plan Year during which Compensation was paid for such Plan Year.

5

(b)For purposes of the Plan and notwithstanding any other provision of this Section 1.16, a Participant’s Compensation for an entire Plan Year shall not exceed $200,000, adjusted for changes in the cost of living as provided in section 415(d) of the Code.  In determining the Compensation of a Participant for purposes of this limitation, the rules of section 414(q)(6) of the Code shall apply, except that in applying such rules, the term “family” shall include only the spouse of the Participant and any lineal descendants of the Participant who have not attained age 19 before the close of the year.

(c)“Compensation” shall not include severance payments, inducement or completion bonuses for periods of overseas or on-location employment, overseas or on-location differential payments, insurance, long-term disability pay, any profit sharing payments, any public or private retirement contributions or benefits, any retainers, any insurance benefits or Company-paid premiums, payments from any stock option and award plan or any savings and stock purchase plan or any other special benefits, provided, however, that recurring overseas bonuses which constitute incentive compensation awards and are paid on a regular basis shall be included in Compensation.

(d)“Compensation” shall not include any portion of salary or any bonus or incentive compensation award the payment of which has been deferred at the election of the Participant; provided, however, that such deferred salary, bonus or incentive compensation attributable to a year used to calculate Average Final Compensation and actually paid in a year used to calculate Average Final Compensation will be treated as Compensation in the year paid.

(e)Subject to (f) below, the Compensation of an Employee who was a participant in the Predecessor Plan on December 31, 1985 and became a Participant in this Plan in connection with the Spinoff of Henley by Allied-Signal shall include all amounts earned during employment by a member of the Allied-Signal controlled group of corporations prior to January 1, 1986 that would have been treated as Compensation pursuant to Section 1.14 of the Predecessor Plan.

(f)Notwithstanding the foregoing provisions of Section 1.7 and this Section 1.16, Compensation shall not include any amount earned by the Participant prior to January 1, 1990 if the Participant’s accrued benefit under this Plan was transferred to The Henley Group, Inc. Retirement Plan in connection with the distribution as of December 31, 1989 to shareholders of the Company of the stock of The Henley Group, Inc. (formerly known as New Henley Inc.) and the division of the Plan into two Plans.

(g)In addition to other applicable limitations set forth in the Plan and notwithstanding any other provision of the Plan to the contrary, for Plan Years beginning on or after January 1, 1994, the annual Compensation (if any) of each Employee taken into account under the Plan shall not exceed the OBRA ‘93 annual compensation limit.  The OBRA ‘93 annual Compensation limit is $150,000, as adjusted by the Commissioner of Internal Revenue for increases in the cost of living in accordance with Code Section 401(a)(17)(B).  The cost-of-living adjustment in effect for a calendar year applies to any period not exceeding 12 months, over which Compensation is determined (“Determination Period”) beginning in that calendar year.  If a Determination Period consists of fewer than 12 months, the OBRA ‘93 annual Compensation limit will be multiplied by a fraction, the numerator of which is the number of months in the Determination Period, and the denominator of which is 12.

6

For Plan Years beginning on or after January 1, 1994, any reference in this Plan to the limit under Code Section 401(a)(17) shall mean the OBRA ‘93 annual Compensation limit set forth in this provision.

In determining the $150,000 (indexed) limit, the family aggregation rules of Code Section 414(q)(6) apply, but the term “family” includes only the spouse of the Participant and any lineal descendants of the Participant who have not attained age 19 before the close of the Plan Year.  To the extent required by applicable Regulations, if the limitation is reached for a family group, then the limitation amount will be prorated among each member of the family group in the proportion that each family member’s compensation bears to the total Compensation of the family group.

Notwithstanding any other provision in the Plan, for purposes of calculating each Section 401(a)(17) Employee’s Accrued Benefit under this Plan, the Accrued Benefit will be the sum of (a) the Employee’s Accrued Benefit as of the last day of the last Plan Year beginning before January 1, 1994, frozen in accordance with Regulation 1.401(a)(4)-13, and (b) the Employee’s Accrued Benefit determined under the benefit formula applicable for the Plan Year beginning on or after January 1, 1994, as applied to the Employee’s years of service credited to the Employee for Plan Years beginning or after January 1, 1994 for purposes of benefit accruals.  A Section 401(a)(17) Employee means an Employee whose current Accrued Benefit as of a date on or after the first day of the first Plan Year beginning on or after January 1, 1994, is based on Compensation for a year beginning prior to the first day of the first Plan Year beginning on or after January 1, 1994, that exceeded $150,000.

(h)“Compensation” shall include any amounts treated as ‘compensation’ under any of the Related Plans with respect to a period when the Participant is entitled to Credited Service pursuant to Section 1.19(a)(v).

(i)The annual compensation of each Participant shall not be increased due to EGTRRA, and no cost of living increases shall be in effect that would result in such an increase.

(j)For purposes of the definitions of “Compensation” in the Plan, amounts under Code Section 125 include any amounts not available to a Participant in cash in lieu of group health coverage because the Participant is unable to certify that he or she has other health coverage.  An amount will be treated as an amount under Code Section 125 only if the employer does not request or collect information regarding the Participant’s other health coverage as part of the enrollment process for the health plan.

Section 1.17Contingent Annuitant.  “Contingent Annuitant” shall mean a person properly designated by a Participant or Former Participant to receive benefits, solely in accordance with Section 3.6 or 3.7 in the event of the Participant’s death after payment of an annuity hereunder commences.

Section 1.18Covered Compensation.  “Covered Compensation” means the average (without indexing) of the Taxable Wage Base (as defined below) in effect for each calendar year during the 35-year period ending with the calendar year in which the Participant attains (or will attain) Social Security Retirement Age.  The Taxable Wage Base in effect for any year following the year in which the determination is being made will be assumed to be equal to the Taxable Wage Base in effect for the calendar year in which the determination is being made.  The Taxable Wage Base is the contribution and benefit base in effect under Section 230 of the Social Security Act as of the beginning of the calendar year.

7

Effective December 31, 1993, the Covered Compensation of each Participant shall be calculated under Section 1.18 of the Plan as of December 31, 1993.  For purposes of such calculation, it shall be assumed that the Taxable Wage Base for each year in the remainder of the 35-year period applicable to the Participant shall remain at the Taxable Wage Base in effect for that Participant for the 1993 calendar year.  Accordingly, the Covered Compensation of each Participant shall be set at a fixed dollar amount as of December 31, 1993 and shall not be adjusted for (i) Compensation or other remuneration the Participant may in fact earn after December 31, 1993 or (ii) any changes in the Taxable Wage Base for calendar years after the 1993 calendar year.

Section 1.19Credited Service.

(a)Except as provided in subparagraph (g), (h) or (i) and consistent with the rules of subparagraphs (b) through (f), the Credited Service of a Participant means the total number of months (for which he receives or is entitled to receive Compensation) of an Employee’s latest period of uninterrupted employment (beginning on the Employee’s employment commencement date or reemployment commencement date, whichever is applicable) with the Company (including any business treated as a Company under Section 10.15), beginning on or after January 1, 1986 and ending on his Severance from Service Date, but not later than the date he ceases to be eligible to continue to be a Participant in accordance with Section 2.1(b).  An individual’s Credited Service also shall include the following periods of time regardless of whether he receives Compensation therefor from the Company:

(i)any period of absence from active employment with the Company prior to his Normal Retirement Date due to Disability, provided the Participant has not elected to receive the Disability Retirement Benefit Payable under Section 3.5;

(ii)any period of absence from active employment with the Company prior to his Normal Retirement Date due to service in the United States Armed Forces, provided he is reemployed by the Company in accordance with applicable statutes following his discharge from military service;

(iii)any period of absence from active employment with the Company prior to his Normal Retirement Date due to a Company directed or authorized leave of absence; and/or

8

(iv)any period of service provided for in Sections 8.8.2 and 8.8.3 of prior Plan documents.

(v)effective for an Employee’s latest period of uninterrupted employment with the Company beginning on or after January 1, 1990 and ending on the earliest of (1) December 31, 1993, (2) the Employee’s Separation from the Service, (3) the Employee’s Severance from Service Date, or (4) the date that the Employee ceases to be eligible to continue to be a Participant in accordance with Section 2.1(b), any period prior to the individual becoming an Employee during which the individual is an ‘employee’ earning ‘credited service’ under any of the Related Plans, or would have earned ‘qualified service’ under the Fisher Scientific International Inc. Retirement Plan, but for the individual’s decision not to participate in said Plan.

(b)In computing the Credited Service of any Employee, which shall be expressed as years and twelfths thereof, a Participant shall be credited with a full calendar month of service only if his employment commences during the first fifteen days of such month, or is terminated after the first fifteen days of such month.  No Employee shall receive credit for more than one (1) month of Credited Service for any one (1) calendar month nor shall he receive credit for more than twelve (12) months of Credited Service during any Plan Year.

(c)An Employee will be deemed to have voluntarily terminated his employment if and as of the date any of the following occurs:

(i)he fails or refuses to return to work for the Company promptly after a sick leave or after a Company directed or authorized leave of absence expires, or after he recovers from disability; or

(ii)he leaves the employ of the Company for service in the Armed Forces of the United States and fails to make application for reemployment by the Company in accordance with applicable statutes following his discharge from military service.

When an Employee is treated as voluntarily terminated as a result of any of the causes listed above, his Credited Service will include the calendar month in which such voluntary termination occurs unless such voluntary termination occurs during the first fifteen days of such calendar month.

(d)Continuation of temporary layoff for lack of work for a period in excess of twelve months shall be considered a discharge effective as of the expiration of twelve months of the layoff.

(e)If an Employee who has met the requirements for a Vested Retirement Benefit set forth herein begins a Period of Severance and subsequently returns to the employ of the Company, his participation in the Plan shall be reinstated immediately.  He shall retain his previously accumulated Credited Service and he shall be credited with additional Credited Service for his continuous eligible employment with the Company after such return.

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(f)If a Participant who has not met the requirements for a Vested Retirement Benefit set forth herein begins a Period of Severance and subsequently returns to the employ of the Company, his participation in the Plan shall be reinstated immediately.  If the total period of time elapsed from the Severance from Service Date to the effective date of his reemployment is less than the period of his previously accumulated Vesting Service, he shall retain his previously accumulated Credited Service and shall be credited with Credited Service under this Plan for his continuous eligible employment during such new period.  If the total period of time elapsed from his Severance from Service Date to the effective date of his reemployment equals or exceeds the greater of five (5) years or his previously accumulated Vesting Service, he shall forfeit his previously accumulated Credited Service and shall be credited with Credited Service for his continuous eligible employment during such new period.

(g)Notwithstanding any other provision of this Section 1.19, the Credited Service of each Participant

(i)who

(A)was actively employed on January 1, 1986 by Henley or a business that became a subsidiary or division of Henley in connection with the Spinoff of Henley by Allied-Signal as of May 27, 1986; or

(B)was actively employed on January 1, 1986 by a member of the Allied-Signal controlled group of corporations and became an Employee in connection with the Spinoff; and

(ii)who was a participant in the Predecessor Plan on December 31, 1985

shall, subject to the transfer of all assets allocable to such Employee from the trust under the Predecessor Plan to the Trust Fund, include all Credited Service under Section 1.16 of the Predecessor Plan.  Notwithstanding anything herein to the contrary, for purposes of calculating the Credited Service of any Employee who is a Participant in the Plan on or after June 1, 1992 and whose Credited Service is calculated in part by reference to Section 1.16(a) of The Signal Companies, Inc. Retirement Plan, such Section 1.16(a) of The Signal Companies, Inc. Retirement Plan shall be modified so as to provide for the calculation of Credited Service from the participant’s date of hire.

(h)Except as provided in subsection 1.19(a)(iv) and (v) of this Plan, the Credited Service of a Participant shall not include any period of employment with the Company during which such Participant was excluded from eligibility to participate in the Plan by subsection 2.1 or during which such Participant was not an Employee.

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(i)Notwithstanding any other provision of this Section 1.19, the term “Credited Service” shall not include the Credited Service of a Participant to the extent such Participant’s accrued benefit under this Plan was transferred to The Henley Group, Inc. Retirement Plan in connection with the distribution as of December 31, 1989 to shareholders of the Company of the stock of The Henley Group, Inc. (formerly known as New Henley Inc.) and the division of the Plan into two plans.

(j)Effective December 31, 1993, the Credited Service of each Participant shall, for benefit accrual purposes under the Plan, be fixed and frozen as of December 31, 1993, and no Credited Service shall, for benefit accrual purposes, be earned for any service rendered after December 31, 1993.  However, Credited Service may continue to be earned after December 31, 1993, in accordance with the provisions of Section 1.19 of the Plan, solely and exclusively for purposes of the early retirement subsidies available under the Plan as of December 31, 1993 and protected under Internal Revenue Code Section 411(d)(6).

Section 1.20Determination Date.  “Determination Date” means the date specified in Section 9.2.

Section 1.21Disability; Disabled.  “Disability” of a Participant or “Disabled” when used with reference to a Participant shall mean that he has been found by the Company employing the Participant, on the basis of competent medical evidence, before December 31, 1993 and while employed by the Company to be unable, by reason of a medically determinable physical or mental impairment which can be expected to result in death or to be of permanent duration, to engage in the level of gainful activity determined under standards adopted by such Company for purposes of this Plan.  The determination by each Company that an employee is “Disabled” for purposes of this Plan shall be made under standards adopted by each Company and applied uniformly, which standards may include the Social Security Act definition of disability, the definition applicable to such Company’s long-term disability programs, if any, or such other definitions as may be adopted from time to time by each Company.  Such determination shall be subject to the approval of the Administrator.

Section 1.22Disability Retirement Date.  “Disability Retirement Date” of a Participant shall mean the first day of any month coincident with or following his Disability, provided the Participant has at least 10 years of Credited Service at his Disability and elects to retire before age 65.

Section 1.23Early Commencement Date.  “Early Commencement Date” shall mean the first day of the month as of which a Participant elects to begin receiving payments prior to his Normal Retirement Date.

Section 1.24Early Retirement Benefit.  “Early Retirement Benefit” shall mean the Benefit payable under Section 3.4.

Section 1.25Early Retirement Date.  “Early Retirement Date” of a Participant shall generally mean the first day of the month, so designated by an Employee, preceding his Normal Retirement Date, and which is coincident with or following the later of his 55th birthday and his completion of ten (10) years of Credited Service or such other date as is provided in Section 3.3.

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Section 1.26Employee.  “Employee” shall mean any employee of any Company (including any person treated as an Employee under Section 10.15) excluding

(a)an employee who will not complete 1,000 Hours of Service during a Plan Year,

(b)a temporary employee, that is, one who is employed by a Company for the specific purpose of working on a designated project for the duration of such project, and

(c)a director who is not otherwise an Employee.

(d)a Leased Employee.  For these purposes a Leased Employee means any person, other than a common law employee of a Company, who pursuant to an agreement between that Company and any other person (“leasing organization”) has performed services for the recipient Company (or for such recipient and one or more related persons determined in accordance with Code Section 414(n)(6)) on a substantially full-time basis for a period of at least one (1) year (as determined in accordance with the applicable provisions of the proposed Income Tax Regulations section 1.414(n)-1(b)(10)), and such services are performed under the primary direction or control of the recipient Company, unless such individual is covered by a money purchase plan maintained by the leasing organization and meeting the requirements of Code Section 414(n)(5)(B), and leased employees do not constitute more than 20% of all Non-Highly Compensated Employees of all Affiliated Companies within the meaning of Code Section 414(n)(5)(C)(ii).

Section 1.27ERISA.  “ERISA” shall mean the Employee Retirement Income Security Act of 1974, as amended.

Section 1.28Former Participant.  “Former Participant” shall mean a person who has Separated from the Service and has become entitled to a Benefit under the Plan.

Section 1.29Henley.  “Henley” shall mean the corporate entity known as The Henley Group, Inc. during the period commencing on May 27, 1986 and ending December 31, 1989.

Section 1.30Henley Properties.  “Henley Properties” shall mean Henley Properties Inc., a Delaware corporation known prior to January 1, 1990 as The Henley Group, Inc. and after the 1992 Merger (as defined in the preamble) as The Bolsa Chica Company.

Section 1.30AHighly Compensated Employee.  “Highly Compensated Employee” means (a) any 5% owner during the current Plan Year or the preceding Plan Year (“look back year”), and (b) any Employee receiving Remuneration within the meaning of Appendix I of the Plan in the look back year in excess of $80,000, as indexed pursuant to Code Section 414(q).

Section 1.31Hour of Service.

(a)“Hour of Service” of an Employee shall mean the following:

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(i)Each hour for which he is paid or entitled to payment (as determined under regulations of the Secretary of Labor without reference to the limitations of Section 1.19) by a Company,

(ii)Each hour in or attributable to a period of time during which he performs no duties (irrespective of whether he has had a Separation from the Service) due to a vacation, holiday, illness, incapacity (including pregnancy or disability), layoff, jury duty, military duty or a leave of absence, for which he is so paid or so entitled to payment; provided, however, that

(A)no more than five hundred and one Hours of Service shall be credited under this paragraph to an Employee on account of any such period, and

(B)no such hours shall be credited to an Employee if attributable to payments made or due under a plan maintained solely for the purpose of complying with applicable worker’s compensation, unemployment compensation or disability insurance laws or to a payment which solely reimburses the Employee for medical or medically related expenses incurred by him.

(iii)Each hour for which he is entitled to back pay, irrespective of mitigation of damages, whether awarded or agreed to by a Company.

(b)Hours of Service under subsection (a) (ii) and (a)(iii) shall be calculated in accordance with 29 CFR Section 2530.200b-2(b).  Each Hour of Service shall be attributed to the Plan Year or initial eligibility year in which it occurs except to the extent that the Company, in accordance with 29 CFR Section 2530.200b-2(c), credits such Hour to another computation period under a reasonable method consistently applied.

(c)Where his Company’s records do not readily permit determination of an Employee’s actual hours, Hours of Service before 1976 shall be the product of

(i)Forty, and

(ii)The number of weeks in which he had an Hour of Service.

(d)Where his Company’s records or procedures do not readily permit determination of an Employee’s actual hours, Hours of Service may be credited under an equivalency method under which an Employee who is customarily employed for at least thirty (30) hours per week throughout each Plan Year (except for holidays and vacations) shall be credited with 190 Hours of Service for each month in which he completes at least one (1) Hour of Service in accordance with the provisions of this section (regardless of whether the number of Hours of Service actually completed in such month exceeds 190).

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(e)Hours of Service shall include hours performed or paid for by any company, which was then or subsequently became controlled by a Company.

(f)Notwithstanding any other provision of this Section 1.31, the Hours of Service of each Employee who became a Participant in connection with the Spinoff of Henley by Allied-Signal as of May 27, 1986 and who participated in the Predecessor Plan on December 31, 1985 shall include all Hours of Service under Section 1.25 of the Predecessor Plan.

Section 1.32Investment Committee.  “Investment Committee” shall mean the Investment Committee designated by the Board of Directors to have the investment responsibilities under the Plan described in Article VII.  Effective September 30, 1993, the Board of Directors or its delegate shall serve as the Investment Committee.

Section 1.33Insurance Company.  “Insurance Company” shall mean any insurance company selected by the Administrator to provide contracts of insurance or annuity contracts to the Trustee for the purpose of funding benefits under the Plan.

Section 1.34Marriage.  “Marriage” (and derivative terms such as “marital,” “married” and “marries”) shall, for all purposes under this Plan, mean a relationship that is recognized as a marriage under applicable federal laws.

Section 1.35Military Leave.  Any Employee who leaves the Company directly to perform service in the Armed Forces of the United States or the United States Public Health Service under conditions entitling him to reemployment rights as provided in the laws of the United States, shall, solely for the purposes of the Plan and irrespective of whether he is compensated by any Company during such period of service be presumed an Employee on Military Leave.  Such presumption shall cease to apply if such Employee voluntarily resigns from the Company during such period of service, or if he fails to make application for reemployment within the period specified by such laws for the preservation of his reemployment rights.  See, also Section 10.17 (Military Service) of this Plan document.

Section 1.36RESERVED

Section 1.37Normal Retirement Benefit.  “Normal Retirement Benefit” shall mean the Benefit payable under Section 3.2.

Section 1.38Normal Retirement Date.  “Normal Retirement Date” of a Participant or Former Participant shall mean the first day of the calendar month coincident with or next following his sixty-fifth birthday, on which date such Participant or Former Participant shall be entitled to the Normal Retirement Benefit provided in Section 3.2.

Section 1.39Participant.  “Participant” shall mean any person included in the Plan as provided in Article II, until such time as such Participant has a Separation from the Service.

Section 1.40Period of Severance.  “Period of Severance” shall mean the period of time commencing on the Severance from Service Date and ending on the date on which an Employee again performs an Hour of Service within the meaning of 29 CFR § 2530.200b-2(a)(1).  Solely for the purpose of determining whether a Period of Severance has occurred, in the case of an Employee who is absent from work for maternity or paternity reasons, a period of absence of two years or less shall not be taken into account.  An absence from work for maternity or paternity reasons means an absence (i) by reason of the pregnancy of the Employee, (ii) by reason of the birth of a child of the Employee, (iii) by reason of the placement of a child with the Employee in connection with the adoption of such child by such Employee, or (iv) for purposes of caring for such child for a period beginning immediately following such birth or placement.

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Section 1.41Plan.  The “Plan” shall mean The Bolsa Chica Company Retirement Plan (formerly known as the Henley Properties Inc. Retirement Plan and, prior to January 1, 1990, known as The Henley Group, Inc. Retirement Plan), as amended and restated from time to time.  Effective December 31, 1993, “Plan” shall mean the Koll Real Estate Group Retirement Plan, as amended and restated from time to time.  Effective January 1, 1999, “Plan” shall mean the California Coastal Communities, Inc. Retirement Plan, as amended and restated from time to time.

Section 1.42Plan Enrolled Actuary.  The term “Plan Enrolled Actuary” shall mean that person who is enrolled by the Joint Board for the Enrollment of Actuaries established under subtitle C of Title III of ERISA and who has been engaged by the Committee on behalf of all Participants to make and render all necessary actuarial determinations, statements, opinions, assumptions, reports, and valuations under the Plan as required by law or requested by the Administrator.

Section 1.43Plan Year.  “Plan Year” shall mean the calendar year, including such years preceding the adoption of the Plan.

Section 1.44Predecessor Plan.  “Predecessor Plan” shall mean The Signal Companies, Inc. Retirement Plan, as in effect on December 31, 1985.

Section 1.45Related Plan.  “Related Plan” shall mean the Pneumo Abex Corporation Retirement Plan, the New Hampshire Oak, Inc. Retirement Plan, the Wheelabrator Technologies Inc. Retirement Plan and the Fisher Scientific International Inc. Retirement Plan.

Section 1.46Retirement Benefit.  “Retirement Benefit” shall mean either the Early Retirement Benefit, the Normal Retirement Benefit, the Disability Retirement Benefit or the Optional Retirement Benefit described in Article III.

Section 1.47Separation from the Service.  “Separation from the Service” of an Employee shall mean his resignation, treatment as voluntarily terminated, discharge, Normal Retirement, Disability Retirement or Early Retirement from the Company, or his death.

Section 1.48Severance from Service Date.  “Severance from Service Date” shall mean the earlier of (a) the date on which an Employee quits, retires, is discharged, dies or is treated as voluntarily terminated, (b) the date on which an Employee on Military Leave (i) voluntarily resigns from the Company or (ii) in the case of an Employee on Military Leave who fails to apply for reemployment, the day next following the last day of the period specified by the laws of the United States for the preservation of such Employee’s reemployment rights, (c) the day next following the date of expiration of a period of educational leave, or (d) the first anniversary of the first date of a period in which an Employee remains absent from service (with or without

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pay) for any reason other than quit, retirement, discharge, death or voluntary termination, such as vacation, holiday, sickness, disability, leave of absence or layoff, provided that (e) with the prior approval of the Company, the Severance from Service Date of an Employee who receives salary continuation in respect of termination of employment may be a date no earlier than the first anniversary, and no later than the second anniversary, of the last date of a period during which salary continuation is provided.  A one-year period of severance is a 12 consecutive month period, beginning on the Severance from Service Date, during which the employee does not perform an hour of service for the employer.

Section 1.49Spinoff.  “Spinoff” shall have the meaning assigned to such term in the Preamble to the Plan.

Section 1.50ASpouse.  For all purposes under this Plan, the terms “spouse” and “surviving spouse” shall mean the individual recognized as an individual’s lawful husband or lawful wife under applicable federal laws.

Section 1.50Social Security Retirement Age.  “Social Security Retirement Age” means:

(i)Age 65 with respect to any Employee who was born before January 1, 1938;

(ii)Age 66 with respect to any Employee who was born after December 31, 1937 and before January 1, 1955; and

(iii)Age 67 with respect to any Employee who was born after December 31, 1954.

Section 1.51Trust.  “Trust” shall mean the trust established pursuant to the Trust Agreement.

Section 1.52Trust Agreement.  “Trust Agreement” shall mean the trust agreement under the Plan as it may be amended from time to time, providing for the investment and administration of the Trust Fund.  By this reference the Trust Agreement is incorporated herein.

Section 1.53Trust Fund.  “Trust Fund” shall mean the fund established under the Trust Agreement by contributions made pursuant to the Plan and from which any amounts payable under the Plan are to be paid.

Section 1.54Trustee.  “Trustee” shall mean the Trustee under the Trust Agreement.

Section 1.55Vested Retirement Benefit.  “Vested Retirement Benefit” shall have the meaning given in Section 3.10.

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Section 1.56Vesting Service.

(a)The Vesting Service of a Participant shall mean the aggregate number of whole year periods of service after he first became an Employee and prior to any Period of Severance whether or not such periods of service were completed consecutively.

(b)The Vesting Service of a Participant shall also include the following Periods of Severance:  (i) a Period of Severance which begins as of the date the Participant quits, is discharged or retires and ends within twelve months of such date; and (ii) a Period of Severance which begins as of the date of any absence from service for any reason not described in (i) above which is then followed by a quit, discharge or retirement and which thereafter ends within twelve months of the original absence.

(c)The Vesting Service of a nonvested Participant who has incurred a Period of Severance of one year or more and is subsequently reemployed shall not include previously earned Vesting Service if, at the time of such reemployment, the Period of Severance equals or exceeds the greater of five (5) years or the previously earned Vesting Service (whether or not consecutive).  For purposes of this subsection, in the case of an Employee who is absent from work for maternity or paternity reasons, the 12-consecutive-month period beginning on the first anniversary of the first date of such absence shall not be counted as part of a Period of Severance.  An absence from work for maternity or paternity reasons means an absence (1) by reason of the pregnancy of the Employee, (2) by reason of a birth of a child of the Employee, (3) by reason of the placement of a child with the Employee in connection with the adoption of such child by such Employee, or (4) for purposes of caring for such child for a period beginning immediately following such birth or placement.

(d)Notwithstanding any other provision of this Section, the Vesting Service of each Employee who became a Participant in connection with the spinoff of Henley by Allied-Signal as of May 27, 1986 and who participated in the Predecessor Plan on December 31, 1985 shall include all Vesting Service under Section 1.49 of the Predecessor Plan.

(e)For purposes of this Section, service with any member of the controlled group of corporations of which the Company is a member (within the meaning of section 414(b), (c) or (m) of the Internal Revenue Code) shall be considered service as an Employee.

(f)For purposes of this Section, service from January 1, 1990 through December 31, 1993 that is treated as ‘vesting service’ under any Related Plan will be considered to be Vesting Service under this Plan.

(g)For purposes of this Section, service of any employee who is a leased employee to any employer aggregated under Code Section 414(b), (c), or (m) will be credited whether or not such individual is eligible to participate in the Plan.

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ARTICLE II

ELIGIBILITY

Section 2.1Requirements for Participation.

(a)Any Employee

(i)who

(A)was actively employed on January 1, 1986 by Henley or a business that became a subsidiary or division of Henley in connection with the Spinoff of Henley by Allied-Signal as of May 27, 1986; or

(B)was actively employed on January 1, 1986 by a member of the Allied-Signal controlled group of corporations and became an Employee in connection with the Spinoff; and

(ii)who was a participant in the Predecessor Plan on December 31, 1985, shall be a Participant in this Plan as of January 1, 1986.

(b)Any Employee who

(i)on the first day of any calendar month after December 1985 an Employee shall become a Plan Participant if he or she has completed either one three hundred sixty-five day period commencing with the first day for which he is entitled to be credited with an Hour of Service within the meaning of 29 CFR § 2530.200b-2(a)(1) upon employment or reemployment, or one calendar year commencing with or after such first period, during which three hundred sixty-five day period or year he had completed one thousand or more Hours of Service as an Employee, and

(ii)is not

(A)an Employee in a division of a Company as to which the Plan has not been adopted, or a Company as to which the Plan was adopted only for positions or classifications excluding the Employee, or

(B)an Employee in a bargaining unit covered by a collective bargaining agreement in existence on March 4, 1975 (unless such agreement provided for coverage hereunder of Employees in such unit) or a bargaining unit which becomes covered by a collective bargaining agreement after such date, with respect to which retirement benefits were the subject of good faith bargaining (unless such agreement provides for coverage hereunder of Employees in such unit), or

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(C)a citizen of a country other than the United States and a resident of a country other than the United States, or

(D)a citizen of a country other than the United States and an Employee of any Company determined by the Administrator to be predominantly involved in international operations, unless the Administrator otherwise determines that such Employee is eligible to participate in this Plan, on the basis of uniform standards applied in a nondiscriminatory manner to all Employees similarly situated, shall be eligible to become a Participant.  Service rendered for a member of the Allied-Signal controlled group of corporations prior to May 27, 1986 by an Employee who was eligible to become a participant in the Predecessor Plan on December 31, 1985, became an Employee in connection with the spinoff of Henley by Allied-Signal and was actively employed on January 1, 1986 by a member of the Allied-Signal controlled group of corporations shall be considered service as an Employee for purposes of this subsection.

(c)For purposes of determining eligibility to participate in the Plan under this Section 2.1, service with any member of the controlled group of corporations of which the Company is a member (within the meaning of section 414(b), (c) or (m) of the Code) shall be considered service as an Employee.

(d)Effective January 1, 1990, for purposes of determining eligibility to participate in the Plan under this Section, service from January 1, 1990 through December 31, 1993 that is counted toward eligibility under any Related Plan shall be considered service as an Employee.

Section 2.2Termination of Participation.  A Participant shall cease to be a Participant on the date on which he is deemed to have Separated from the Service.  A Former Participant who returns to the employ of the Company shall be reinstated as a Participant immediately and his Credited Service and Vesting Service as of such date shall be calculated in accordance with the rules in Section 1.19 and Section 1.56, respectively.

Section 2.3Forfeitures.  If a Participant has a Separation from the Service for any reason prior to his acquisition of a Vested Retirement Benefit, his Accrued Benefit shall be forfeited when his continuous Period of Severance equals or exceeds the greater of five (5) years or his previously earned Vesting Service (whether or not completed consecutively).

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Section 2.4Freeze.  Notwithstanding anything to the contrary in the Plan, there shall be no new Participants in the Plan after December 31, 1993, and any Employees who would otherwise commence their participation in the Plan after December 31, 1993 shall not be eligible for such participation and shall not accrue any retirement or other benefits under the Plan.  Accordingly, the participant group in the Plan shall be fixed and frozen as of December 31, 1993.

ARTICLE III

RETIREMENT, TERMINATION, OR DEATH

Section 3.1Normal Retirement.  A Participant may retire on his Normal Retirement Date or the first day of any month thereafter.

Section 3.2Normal Retirement Benefit.

(a)A Participant who retires on or after his Normal Retirement Date shall receive a Normal Retirement Benefit which shall not be less than the Participant’s Accrued Benefit and shall consist of a monthly payment commencing on the first day of the month coincident with or next following the date he retires and ending with the month in which his death occurs.

(b)Effective January 1, 1990, except as provided in subsections (c) through (i), his Normal Retirement Benefit shall be the greater of (A) the sum of (i) , (ii) and (iii), less (iv), and (B) the sum of (i) , (ii) and (iii) determined without regard to the Credited Service described in Section 1.19(a)(v) or the Compensation described in Section 1.16(h):

(i)1.1% of his Average Final Compensation up to Covered Compensation multiplied by his Credited Service (but not more than 35 years);

(ii)1.5% of his Average Final Compensation in excess of Covered Compensation multiplied by his Credited Service (but not more than 35 years);

(iii)1.5% of his Average Final Compensation multiplied by Credited Service in excess of 35 years.

(iv)His “normal retirement benefit” payable under any Related Plan which is based on Credited Service described in Section 1.19(a)(v).

(c)A Participant’s Normal Retirement Benefit shall not

(i)except as provided in subsections (c) through (i), be less than 1.25% of his Average Final Compensation multiplied by his Credited Service; provided, however, that for this purpose Average Final Compensation shall be computed by taking into account only the Compensation described in subsections 1.16(a)(i) and (iii) of this Plan, provided that

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(ii)in the case of a Participant who had his Separation from the Service at the time he was employed at the La Jolla facility or the Hampton facility of the Company, be less than the greater of (A) his Normal Retirement Benefit calculated in accordance with subsection(i) above or (B) the greater of (1) $20.00 times his Credited Service or (2) 1% of his Average Final Compensation multiplied by his Credited Service.

(d)Notwithstanding anything in the Plan to the contrary, in no event shall a Participant’s or Former Participant’s monthly Benefit payment under Section 3.2, 3.5, 3.4(b) or 3.10 be less than the largest monthly Benefit payment under Section 3.4(b) to which he could have become entitled by electing, at any time, Early Retirement under Section 3.3.

(e)In the case of an Employee of a Company who was a participant on December 31, 1983 in a plan which merged with the Predecessor Plan on January 1, 1984, the provisions of which plan require any adjustments for additional benefits, offset benefits, predecessor plan benefits or, except in the case of UOP Realty Development Company, any amounts representing employee contributions which are withdrawn by the Participant at retirement, such adjustments shall be applied in the manner specified in such plan against the Normal Retirement Benefit provided under subparagraph (b) to determine the amount payable hereunder to such participant.

(f)In the case of an Employee other than an Employee of UOP Realty Development Company who was a participant on December 31, 1983 in a plan which merged with the Predecessor Plan on January 1, 1984, who made employee contributions to any retirement plan or any other pension or profit sharing plan of any Company which contribution increased the amount of any retirement benefit payable under such plans, the provisions of such plans in effect on December 31, 1983 shall govern the timing and manner of the payment of such contributions or benefits provided, however, that the interest rate used to accumulate such employee contributions after December 31, 1983 shall in no event be less than the interest rate provided in the definition of Actuarial Equivalent under this Plan and the accumulated amount at retirement will be converted to an annuity using the lump sum factor described in Section 3.8.

(g)The Normal Retirement Benefit of any Participant who was transferred from a Company described in (c)(i) to a Company described in (c)(ii) or from a Company described in (c)(ii) to a Company described in (c)(i) shall be calculated as though the Employee had, at all times, been employed by his Employer on the date of his Separation from the Service, provided that in no event will his Normal Retirement Benefit be less than his Accrued Benefit on the date of any transfer.

(h)The Benefit of a Participant who elects an Optional Retirement Benefit under Section 3.6 and the Benefit of a Participant who is married on his Normal or Early Retirement Date and has not elected not to receive the automatic Statutory Joint and Survivor Annuity provided under Section 3.7, shall be determined under the provisions of Section 3.6 or 3.7, respectively.

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(i)In the case of an Employee who made contributions to any retirement plan sponsored by UOP, Inc., which merged with the Predecessor Plan on January 1, 1984, which contributions were not withdrawn prior to or as of his Normal Retirement Date, the Normal Retirement Benefit payable under this section shall be increased by the amount of such contributions accumulated to such date at the interest rate applicable under the prior plan (but after December 31, 1983, in no event less than the interest rate specified in the definition of Actuarial Equivalent hereunder) expressed as the actuarial equivalent of a single life annuity.

Section 3.3Early Retirement.

(a)A Participant may voluntarily retire on his Early Retirement Date upon written notice to the Administrator designating such date.  A Participant who undergoes a Separation from the Service after he has qualified for Early Retirement may elect to have Benefits commence in accordance with this Section at or after such Separation, and the designated effective date of such election shall be his Early Commencement Date.

(b)Notwithstanding the foregoing, any Employee who was eligible to retire as of December 31, 1985 under the terms of the Predecessor Plan shall be eligible to retire under this Plan.

(c)Notwithstanding the foregoing, any Employee or former Employee who was an employee participating on December 31, 1983 in the UOP Pension Plan, or in any like plan maintained by UOP, Inc. on such date, or any Employee who would otherwise have become a participant in such a plan upon completing the applicable eligibility requirements, shall be eligible to retire on or after his fifty-fifth birthday and the completion of five years of Vesting Service.

(d)Notwithstanding the foregoing, any Employee or former Employee who was a Participant on December 31, 1983 in the Signal Retirement Plan (as defined in the Predecessor Plan) shall be entitled to retire under this Plan with respect to his Accrued Benefit as of December 31, 1988 at the time and using the reduction factors specified in the Signal Retirement Plan in effect on such date.

Section 3.4Early Retirement Benefit.

(a)A Participant who retires on his Early Retirement Date, or Former Participant who at the time of his Separation from the Service has qualified for Early Retirement, shall receive a benefit which shall be no less than his Accrued Benefit provided under Section 3.10(c), appropriately reduced, as provided under Section 3.4(b)(ii) and, subject to the provisions of Sections 3.6 and 3.7, shall consist of a monthly payment commencing upon his Early Commencement Date and ending with the month in which his death occurs.

(b)The amount of each such monthly payment shall, subject to Section 3.2(d), be an amount determined by reducing

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(i)his Normal Retirement Benefit, computed under Section 3.2(b) on the basis of his Credited Service completed prior to his Early Retirement Date plus the number of years and fractional years from his Separation from the Service to his Normal Retirement Date, multiplied by a fraction, the numerator of which is his Credited Service and the denominator of which is his Credited Service plus the number of years and fractional years from his Separation from the Service to his Normal Retirement Date, and under Section 3.2(c) on the basis of his Credited Service completed prior to his Early Retirement Date, by

(ii)1/3 of 1% for each of the first 60 months (if any) by which his Early Commencement Date precedes the first day of the month coincident with or next following his 60th birthday; provided, however, that for Participants who attain age 55 in the year 2009 or later, the reduction factor provided for under this subparagraph (ii) shall be equal to 1/3 of 1% for each of the first 36 months and 5/12 of 1% for each additional month up to 24 months (if any) by which his Early Commencement Date precedes the first day of the month coincident with or next following his 60th birthday.

(c)An Employee or former Employee who was a Participant in the Signal Retirement Plan (as defined in the Predecessor Plan) on December 31, 1983 shall, in addition to the monthly payment provided in subparagraph (b) above, receive a temporary additional Early Retirement Benefit of $150.00 per month ending with the earliest of the month in which he dies, the month before his 62nd birthday or the date of eligibility for full or reduced Social Security benefits.

(d)In the case of an Employee who is eligible to retire before age fifty-five by virtue of subparagraph (b) or (d) of Section 3.3, the Early Retirement Benefit payable hereunder shall be further reduced before age fifty-five by an Actuarial Equivalent reduction factor for the months, if any, by which his Early Commencement Date precedes the first day of the month coincident with or next following his fifty-fifth birthday.

(e)In the case of an Employee who made contributions to any retirement plan sponsored by UOP, Inc., which merged with the Predecessor Plan on January 1, 1984, which contributions were not withdrawn prior to or as of his Early Retirement Date, the Early Retirement Benefit payable under this section shall be increased by the amount of such contributions accumulated to such date at the interest rate applicable under the Predecessor Plan (but after December 31, 1983, in no event less than the interest rate specified in the definition of Actuarial Equivalent hereunder) expressed as the actuarial equivalent of a single life annuity.

Section 3.5Disability Retirement Benefit.

(a)A Participant who has at least ten years of Credited Service at his date of Disability, and who retires on his Disability Retirement Date prior to December 31, 1993, may elect, in a manner prescribed by the Committee, to receive a Disability Retirement Benefit which

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shall be no less than his Accrued Benefit, appropriately reduced, as provided under Section 3.10(c) and, subject to the provisions of Sections 3.6 and 3.7, shall consist of a monthly payment on the first day of each calendar month commencing with his Disability Retirement Date and ending with the month in which his death occurs or, if earlier, the month in which his Disability ceases.

(b)The amount of each such monthly payment shall be the greater of (x) the amount computed by reducing (i) his Normal Retirement Benefit, computed under Section 3.2(b) on the basis of his Credited Service completed prior to his Disability Retirement Date multiplied by a fraction, the numerator of which is his Credited Service, and the denominator of which is his Credited Service plus the number of years and fractional years from his Disability Retirement Date to his Normal Retirement Date, by (ii) 1/3 of 1% for each of the first 60 months (if any) by which his Disability Retirement Date precedes his 60th birthday, provided, however, that for Participants who attain age 55 in the year 2009 or later, the reduction factor shall be 1/3 of 1% for each of the first 36 months and 5/12 of 1% for each additional month up to 24 months (if any) by which his Disability Retirement Date precedes his 60th birthday; and with an Actuarial Equivalent reduction factor applied for each month in excess of such first 60 months, or (y) the amount of his Normal Retirement Benefit computed under Section 3.2(c)(i) or (ii) on the basis of Credited Service completed prior to his Disability Retirement Date, whichever is applicable to such Participant, reduced by the amount referred to in (x)(ii) of this Section 3.5(b), but with such reduction limited to 50%.

(c)If a Former Participant’s Disability ceases and he thereupon again becomes an Employee his Disability Retirement Benefit shall cease and he shall resume status as a Participant.  Such Former Participant shall accrue Credited Service in accordance with the terms of the Plan for any period prior to his Normal Retirement Date after resuming status as a Participant.  The Normal Retirement Benefit payable to such Participant on his Normal Retirement Date shall be redetermined by taking into account total Credited Service including the period of disability, Compensation, etc. as required by the terms of the Plan and benefits already paid hereunder.

(d)In the case of an Employee who made contributions to any retirement plan sponsored by UOP, Inc., which merged with the Predecessor Plan on January 1, 1984, which contributions were not withdrawn prior to or as of his Disability Retirement Date, the Disability Retirement Benefit payable under this section shall be increased by the amount of such contributions accumulated to such date at the interest rate applicable under the prior plan (but after December 31, 1983, in no event less than the interest rate specified in the definition of Actuarial Equivalent hereunder) expressed as the actuarial equivalent of a single life annuity.

Section 3.6Optional Retirement Benefit.

(a)A Participant or Former Participant entitled to receive a Normal or Early Retirement Benefit or a Participant who is entitled to receive a Disability Retirement Benefit, shall generally receive the joint and survivor annuity provided in Section 3.7 (so long as such Participant is otherwise described in Section 3.7), unless such Participant elects not to receive such annuity and elects instead to receive a distribution in a form specified in subsections (i), (ii), (iii) or (iv) below.  In addition, to be effective, any election made under this Section 3.6 must be

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made by the Participant himself, must be in writing on a form prescribed by the Administrator, must name the Beneficiary if a form of joint annuity is chosen, must be signed by the Participant and, if required by the Administrator, by the Participant’s spouse and must be filed with the Administrator prior to the date his benefits are to commence.  A Participant to whom Section 3.7 does not apply and who makes no written election under this Section shall receive a Benefit in accordance with subsection (i) below.  A Participant may elect, in accordance with the requirements of the Administrator, to receive his Benefit in any one of the following manners:

(i)A Normal, Early or Disability Retirement Benefit, as the case may be, in the form of a single life annuity,

(ii)A reduced monthly Benefit payable during his Normal, Early or Disability Retirement Benefit period with the provision that if he dies after his Normal, Early, or Disability Retirement Date, as the case may be, survived by his properly designated Contingent Annuitant, such Contingent Annuitant shall receive a monthly Benefit in the same amount (or in 50%, 66 2/3% or 75% of that amount if the Participant shall so elect) until the first day of the calendar month in which the Contingent Annuitant’s death occurs provided, however, that if the Contingent Annuitant is other than the Participant’s spouse, not less than 50% of the actuarial value of the Participant’s Normal, Early, or Disability Retirement Benefit must be applied to provide Benefits payable to the Participant during his life under this subsection.  (This election shall not take effect if the Contingent Annuitant does not survive until the commencement of payments under this subsection),

(iii)An increased retirement benefit payable during the Participant’s lifetime until age 62, decreased after age 62 by the expected Social Security Benefit and payable at such reduced rate during the remainder of the Participant’s life, so as to produce, as nearly as possible, a level retirement income.  Such benefit shall be payable, at the Participant’s option, in the form of a life annuity or a contingent annuity with 50%, 66 2/3%, 75% or 100% payable to the Participant’s designated Contingent Annuitant in the event of the Participant’s death and until the first day of the calendar month in which the Contingent Annuitant’s death occurs, provided, however, that notwithstanding anything to the contrary in this Plan, effective January 1, 1985, distributions will be made in accordance with the Regulations under Code Section 401(a)(9), including the minimum distribution incidental benefit requirement of Code Section 401(a)(9)(G). (An election of a benefit payable to a Contingent Annuitant pursuant to this section shall not take effect if the Contingent Annuitant does not survive until the commencement of payments under this subsection), or

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(iv)A reduced retirement benefit payable during the Participant’s life, with a guarantee that not less than a fixed number of payments will be made to the Participant or, if the Participant dies prior to the expiration of such fixed number of years, to the Participant and the Participant’s Beneficiary, in the aggregate.  The Participant may select a guarantee of 60, 120 or 180 payments.  If a Participant elects this option, the Participant shall also designate the Beneficiary to whom monthly payments will be continued if the Participant dies before having received the fixed number of payments.  The Participant shall (subject to the consent requirements of this Section) have the right to change such Beneficiary prior to the Participant’s annuity starting date upon giving notice in writing to the Administrator.  If a Participant elects this option and dies in active employment with a Company, the Beneficiary will not be entitled to any rights or benefits under the Plan, except in accordance with Section 3.9 hereof.

(b)Notwithstanding (i) , (ii), (iii) or (iv) above, the payment of the Actuarial Equivalent of any stream of payments or of any annuity paid to Beneficiaries shall be paid pursuant to the requirements of Section 3.15.

(c)A Former Participant entitled to a Normal Retirement Benefit in a form prescribed in this section or pursuant to Section 3.7 who has previously left the employ of the Company shall be notified of such entitlement as provided in Section 10.8 of the Plan.

(d)Subject to the foregoing provisions of this Section 3.6 and to the provisions of Section 3.7, a Participant or Former Participant who (i) made employee contributions to the UOP Pension Plan prior to January 1, 1984, (ii) elects after October 1, 1988 and prior to March 1, 1990 to withdraw all such contributions with accrued interest, and (iii) has an accrued benefit under the Plan immediately following such withdrawal the present value of which (determined using the Actuarial Equivalent definition applicable to small benefit cashouts under Section 3.13) is equal to $5,000 or less, may elect to receive an immediate lump sum distribution of such remaining accrued benefit.

Section 3.7Statutory Joint and Survivor Annuity.

(a)Notwithstanding anything in the Plan to the contrary, the Benefit, if any, of a Participant or Former Participant commencing on his “Annuity Starting Date” (meaning either the first day of the first period with respect to which an amount is received as a life annuity; or in the case of a benefit not payable in the form of an annuity, the first day on which all events have occurred which entitle the Participant to an annuity) shall be a statutory joint and survivor annuity which is immediately available, as described in subsection, if

(i)he was married upon his Annuity Starting Date,

(ii)he notified the Administrator in writing prior to his Annuity Starting Date that he was married, and

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(iii)he has not otherwise elected under subsection.

(b)The joint and survivor annuity of a Participant or Former Participant shall be a Benefit, reduced as provided in subsection, consisting of monthly payments to him beginning on his Annuity Starting Date and ending with the calendar month in which his death occurs with the provision that, if he dies after his Annuity Starting Date survived by the spouse to whom he was married on his Annuity Starting Date, such spouse shall receive monthly payments of fifty percent of such reduced Benefit beginning on the first day of the calendar month following the month in which the Participant or Former Participant dies.  Payments to such Participant’s or Former Participant’s spouse continue until the first day of the calendar month following the spouse’s death.  For the avoidance of doubt, Participants may receive a reduced monthly amount during their lifetime and, after their death, 50%, 66-23%, 75% or 100% of that amount will be paid to the Participant’s spouse or to another named contingent annuitant.

(c)The reduced Benefit payable under this Section to a Participant or Former Participant during his lifetime shall be at a monthly rate such that his joint and survivor annuity is the Actuarial Equivalent of his Disability, Early or Normal Retirement Benefit, as the case may be.

(d)A Participant or Former Participant referred to in subsection (a) may elect in writing, in the manner prescribed by the Administrator and with the consent of such Participant’s or Former Participant’s spouse, if required by the Administrator, not to receive a joint and survivor annuity (in which case he shall receive his Benefit as otherwise provided in the Plan).  Such an election must satisfy the requirements of Section 3.14(b).  Such an election shall be made not earlier than:

(i)90 days before the commencement of the distribution of any part of an Accrued Benefit under this Plan,

and not later than the later of

(ii)his Annuity Starting Date, or

(iii)the ninetieth (90th) day after the mailing or personal delivery to him of information referred to in subsection 3.7(e).

Such an election may be revoked, or revoked and re-elected, at any time during the applicable election period described in this subsection 3.7(d).  A Participant may request additional information regarding the notices he receives under subsection 3.7(e).  However, such a request for additional information must be made within 60 days after the notices have been mailed or personally delivered.  Should a Participant request additional information, then the applicable election period described in this subsection 3.7(d) shall be extended so that it ends 90 days after the requested additional information has been mailed or personally delivered to the Participant.  If a Participant (i) has separated from service, (ii) is entitled to receive or is currently receiving a Qualified Joint and Survivor Annuity under Code Section 401(a)(11), and (iii) has not had an election described in this subsection 3.7(d) made available to him, then the Plan shall provide to such a Participant an election to receive the balance of his benefits in the form of an Optional Retirement Benefit, described in Section 3.6.  Such a Participant shall have 90 days after notice of the election is mailed or personally delivered to him in which to make the election described in the preceding sentence.  If the Participant has died, then the election shall be made available to the Participant’s personal representative.  The balance of the Participant’s benefits distributed under such an election may be adjusted, if applicable, for payments previously distributed in the form of a Qualified Joint and Survivor Annuity.

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(e)Each Participant or Former Participant shall receive from the Administrator nontechnical explanations of the availability and consequences of the election provided hereunder at such time and in such a manner so as to comply with all Internal Revenue Service Regulations that may be promulgated in this regard.

(f)During the period described in subsection, a participant or Former Participant who properly elected thereunder not to receive a joint and survivor annuity may revoke such election and after any such revocation, an election under subsection ay be made again prior to the expiration of such election period.

(g)Notwithstanding the foregoing, a Participant may, after receiving the written explanation described in subsection (e) above (“Notice”), affirmatively elect (with spousal consent if necessary) to have his or her benefit commence (annuity starting date) sooner than 30 days following receipt of the Notice, provided all of the following 5 requirements are met:

(i)The Administrator (or its delegate) clearly informs the Participant that he or she has a period of at least 30 days after receiving the Notice to decide when to have his or her benefit begin and, if applicable, to choose a particular optional form of payment;

(ii)The Participant affirmatively elects a date for benefits to begin and, if applicable, an optional form of payment, after receiving the Notice;

(iii)The Participant is permitted to revoke his or her election until the later of the annuity starting date or 7 days following the date the Participant received the Notice;

(iv)The Participant’s annuity starting date is after the date the Notice is provided (however the annuity starting date may be before the expiration of the 7-day period referred to in item (v), below and before the date of the Participant’s affirmative distribution election); and

(v)Payment does not commence less than 7 days following the day after the Notice is received by the Participant.

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Section 3.8Actuarial Equivalence.

The Participant’s Optional Retirement Benefit under Section 3.6 or the Benefit provided under Section 3.7 shall be the Actuarial Equivalent of his Normal, Early, or Disability Retirement Benefit, said Equivalent being computed as of the date payments commence.

Section 3.9Death Benefit - Qualified Preretirement Survivor Annuity.

(a)If a Participant dies after becoming eligible for an Early Retirement Benefit while he is an Employee (including a Participant who was so eligible, was Disabled and did not elect to receive a Disability Retirement Benefit and a Former Participant who was eligible at the time of his Separation from the Service to receive Early Retirement Benefits, but who elected to defer his Early Commencement Date beyond such Separation from the Service), and is survived by a spouse, such spouse shall receive a Benefit equal to one-half of the amount such Participant would have received (other than pursuant to Section 3.4(e)) had he retired immediately preceding his death and had he elected to receive a single life annuity.

(b)Subject to the limitation imposed by Section 3.6(b), in the event of the death of a Participant who is not survived by a spouse (or if the spouse dies after Benefits described in subparagraph (a) above have commenced) but is survived by one or more children of the Participant under the age of 21, each periodic payment of the Benefit described in subparagraph (a) above shall be paid in equal shares among all of such children who are under the age of 21 at the time of such payment, and shall continue to be paid until the last of such children either attains age 21 or dies.

(c)Notwithstanding the foregoing and subject to the limitation imposed by Section 3.6(b), in the case of an Employee other than an Employee of UOP Realty Development Company who was a Participant on December 31, 1983 in a plan which merged with the Predecessor Plan on January 1, 1984, the Death Benefit payable hereunder to a Participant’s spouse or beneficiary shall in no event be less than the amount of any employee contributions made to such plans, accumulated to the earlier of the date benefits commence payment or the Participant’s Normal Retirement Date, at the interest rate applicable under the Predecessor Plan (but after December 31, 1983, in no event less than the interest rate specified in the term Actuarial Equivalent under this Plan), less any benefits received by the Participant or Beneficiary.

(d)In the case of an Employee who was a participant on December 31, 1983 in a plan which merged with the Predecessor Plan on January 1, 1984 which provided for the payment of a death benefit to the surviving spouse of any Employee who died after a stated period of service, a Death Benefit shall be payable hereunder to the surviving spouse of such an Employee in an amount equal to the greater of the amount which would have been payable to such spouse had such Employee died on December 31, 1983 or the Death Benefit payable under subparagraph (a) .

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(e)In the case of the death of any Employee or former Employee who made contributions to any retirement plan sponsored by UOP, Inc. which was merged with the Predecessor Plan on January 1, 1984, and the death of any and all persons to whom benefits were being paid under Section 3.6 or 3.7 on behalf of the Employee following the Employee’s death, there shall be paid in a lump sum to the Beneficiary of the Employee the amount of any contributions made to such plan by the Employee accumulated to the earlier of the date benefits commence payment or the Employee’s Normal Retirement Date at the interest rate applicable under such plan, but after December 31, 1983 in no event at a rate less than the interest rate specified in the definition of Actuarial Equivalent under this Plan, less any benefits paid with respect to such contributions to the Employee and to such other person or persons under Section 3.6 or 3.7, except that if benefits are payable under Section 3.9(a) following the Employee’s death, the amount of such contributions accumulated with interest as provided for above shall be paid to the Employee’s spouse in the form of an actuarial equivalent life annuity based on such spouse’s age at the date of death of the Employee unless such spouse shall elect in writing to receive such contributions in the form of a lump sum payment.

(f)If a Participant who has fulfilled the requirements for a Vested Retirement Benefit dies before his entire Benefit has been paid to him and before the earliest date which the Participant could have designated as his Early Retirement Date, or if a Former Participant who has fulfilled the requirements for a Vested Retirement Benefit dies before his Benefit commences payment, his surviving spouse, if any, shall be entitled to receive the greater of the benefits, if any, described in subsection 3.9(d) above or benefits having the effect of a Qualified Preretirement Survivor Annuity, as described below, unless such spouse had not been married to the Participant or Former Participant for at least one year at the time of his death.  The benefits payable to the spouse of a Participant (or Former Participant) who dies before the earliest date which the Participant could have designated as his Early Retirement Date shall commence with the month in which the Participant would have reached the earliest date which could have been designated as his Early Retirement Date or the first day of any month thereafter up to and including the first day of the month next following the date on which the Participant would have attained age 65, as elected by the spouse, and shall be equal to one half of the amount which would have been payable to such Participant if he had (a) separated from service on the date of death; (b) survived to the earliest date which could have been designated as his Early Retirement Date or the first day of any month thereafter, as elected by the spouse and (c) commenced payment on such date with an immediate straight life annuity.  The benefit payable to the spouse of a Former Participant who dies after the earliest date which the Former Participant could have designated as his Early Commencement Date but before his Benefit commences payment shall commence with the month following the date of death or the first day of any month thereafter up to and including the first day of the month next following the date on which the Participant would have attained age 65, as elected by the spouse, and shall equal to one half the amount which would have been payable to such Former Participant if he had commenced payment with an immediate straight life annuity on the day before such Former Participant’s death or the first day of any month thereafter up to and including the first day of the month next following the date on which the Participant would have attained age 65, as elected by the spouse.

(g)Except as expressly herein provided, no Benefit shall be payable hereunder upon the death of a Participant or Former Participant.

(h)If the spousal benefit described above is not fully subsidized, the Participant may waive the spousal benefit described above by following the procedures described below.

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(i)Notice.  During the Applicable Period (defined below), the Committee will provide the Participant with an explanation of the terms and conditions of the spousal benefit, the Participant’s right to make, and the effect of, an election to waive the spousal benefit, the rights of the Participant’s spouse to approve such a waiver, the Participant’s right to revoke such a waiver at any time before the Participant’s death and the effect of the Participant’s right to revoke such a waiver.

(ii)Procedure.  A Participant’s waiver of the spousal benefit must be made on a form prepared by, and delivered to the Committee during the period (“Applicable Period”) that begins with the first day of the Plan Year in which the Participant attains age 35 and ends with the death of the Participant; provided, however, if a Participant ceases to be an Employee before the first day of the Plan Year in which the Participant attains age 35, this period will begin on the day the Participant ceases to be an Employee.  A Participant may revoke such a waiver at any time before the first to occur of the Participant’s Annuity Starting Date or the Participant’s death by delivering a subsequent form to the Committee that satisfies the waiver provisions of this Plan.

(iii)Spousal Consent.  The Participant’s surviving spouse must waive any rights to the spousal benefit in a written document that acknowledges the effect of the waiver, and that is witnessed by a notary public or, to the extent permitted by the Company, by a Company representative.  Spousal consent will be irrevocable; provided, however, that spousal consent will be deemed to be revoked if the Participant changes his or her waiver election.

(iv)Waiver Unnecessary.  If the Participant is legally separated or abandoned (within the meaning of local law) and the Participant has a court order to that effect (and there is no Qualified Domestic Relations Order as defined in Code Section 414(p) that provides otherwise), or the surviving spouse cannot be located, then the waiver described in the preceding paragraph need not be filed with the Committee when a married Participant waives a spousal benefit under this Plan.

(v)Effect of Waiver.  Any waiver by a spouse obtained pursuant to these procedures (or establishment that the consent of a spouse could not be obtained) will be effective only with respect to that spouse.

(i)The surviving spouse need not begin receiving a qualified preretirement survivor annuity prior to the time the Participant would have attained age 65 except where the present value of the nonforfeitable benefit does not exceed $5,000.

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Section 3.10Vested Retirement Benefit.

(a)Each Participant who has completed five (5) years of Vesting Service or who has reached his Normal Retirement Date while an Employee shall be entitled to a Vested Retirement Benefit equal to his Accrued Benefit.  In the event of his Separation from the Service prior to his Normal, Early or Disability Retirement Date, a vested Former Participant shall, upon the earlier of his Normal Retirement Date or his attainment of age 55 (or applicable earlier retirement age) become entitled to receive a Normal, Early but with an Actuarial Equivalent early reduction factor applied or Optional Retirement Benefit as he shall elect (or in the absence of such election, as determined in the manner of Section 3.2, 3.4 or 3.7), all in an amount equal or Actuarially Equivalent to his Accrued Benefit payable at age 65.  In addition, any Employee or former Employee who was a Participant in the Signal Retirement Plan (as defined in the Predecessor Plan) on December 31, 1983 and who completes five years of Vesting Service and attains his thirty-fifth birthday, shall be entitled to a Vested Retirement Benefit equal to his Accrued Benefit as of such date.  In the event of his Separation from the Service prior to his Normal, Early, or Disability Retirement Date, a vested Former Participant shall upon his Normal or Early Retirement Date become entitled to a Normal, Early but with an Actuarial Equivalent early reduction factor applied or Optional Retirement Benefit as he shall elect (or in the absence of such election, as determined in the manner of Section 3.2, 3.4, or 3.7), all in an amount equal or Actuarially Equivalent to his Accrued Benefit payable at age 65.

(b)An Employee’s “Accrued Benefit” as of his Separation from the Service shall be equal to his Normal Retirement Benefit computed under Section 3.2(b) on the basis of his Credited Service completed prior to such Separation plus the number of years and fractional years from the date of such Separation to his Normal Retirement Date, multiplied by a fraction, the numerator of which is his Credited Service and the denominator of which is his Credited Service plus the number of years and fractional years from the date of such Separation to his Normal Retirement Date, and under Section 3.2(c) on the basis of his Credited Service completed prior to such Separation.

(c)Notwithstanding the foregoing, the “Accrued Benefit” of a non highly compensated Participant shall not be less than his Accrued Benefit computed under the terms of the Plan immediately prior to April 30, 1991, the adoption date of a prior amended and restated version of the Plan.  The “Accrued Benefit” of any highly compensated Participant shall not be less than his Accrued Benefit on December 31, 1988.  The Accrued Benefit of any person who becomes a highly compensated person after December 31, 1988 shall not be less than his Accrued Benefit as of December 31 of the year prior to the year in which he becomes a highly compensated participant.

(d)An Employee or former Employee who made contributions to any retirement plan sponsored by UOP, Inc. which was merged with the Predecessor Plan on January 1, 1984 may, by written election at any time after Separation from the Service and prior to or as of the date any monthly benefit first becomes payable hereunder, withdraw such contributions with interest at the rates specified in Section 3.2(i) above, accumulated to the end of the calendar month immediately preceding the date of such written election.

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(e)If the present value of the Participant’s vested Accrued Benefit is zero at the time of his Separation from the Service, then that Participant shall be deemed to have received an immediate distribution of that vested Accrued Benefit on his Severance from Service Date.

(f)The Accrued Benefit for each Section 401(a)(17) employee (defined below) under this Plan will be the sum of (i) the employee’s Accrued Benefit as of December 31, 1993 and (ii) the employee’s Accrued Benefit (if any) determined under the benefit formula applicable for a Plan Year beginning on or after January 1, 1994, as applied to the employee’s years of service (if any) credited to the employee for Plan Years beginning on or after January 1, 1994 for purposes of benefit accruals.  A Section 401(a)(17) employee means an employee whose current Accrued Benefit as of a date on or after the first day of the first Plan Year beginning on or after January 1, 1994, is based on Compensation for a year beginning prior to the first day of the first Plan Year beginning on or after January 1, 1994, that exceeded $150,000.

(g)Notwithstanding anything to the contrary in the Plan, no Participant shall accrue any additional retirement benefits under the Plan after December 31, 1993, and the Accrued Benefit of each Participant shall be fixed and frozen on December 31, 1993 on the basis of the Participant’s Average Final Compensation (through December 31, 1993), years of Credited Service and Covered Compensation through December 31, 1993.  Accordingly, the Normal Retirement Benefit under Section 3.2 of the Plan, the Early Retirement Benefit under Section 3.4 of the Plan, the Disability Retirement Benefit under Section 3.5 of the Plan, and the Vested Retirement Benefit under Section 3.10 of the Plan which each Participant may have accrued through December 31, 1993 shall be fixed and frozen in accordance with the principles set out in Section 1.7 (Average Final Compensation), Section 1.19 (Credited Service), and Section 1.18 (Covered Compensation).

(h)If the Plan’s vesting schedule is amended, the vested percentage of every Employee who is a Participant on the amendment adoption date or the amendment effective date, whichever is later, may not be less than the Participant’s vested percentage determined under the Plan without regard to the amendment.  In addition, if the Plan’s vesting schedule is amended, each such Participant who has completed 3 Years of Service and whose vested percentage is determined under the new vesting schedule may elect to have his or her vested percentage determined under the old vesting schedule if the old vesting schedule would be more favorable.

(i)An Employee’s right to his or her normal retirement benefit is nonforfeitable on attainment of age 65.

Section 3.11Suspension of Benefits.

(a)Payment of any benefit derived from Company contributions to which a Participant would otherwise be entitled shall be suspended for any calendar month in which the Participant completes 40 or more hours of service with the Company or with any member of the controlled group; provided, however, that individual companies may adopt non-discriminatory procedures to permit payment of benefits during reemployment.  Any suspension shall be effected in accordance with Department of Labor Regulations § 2530.203-3 (29 CFR 2530.203-3), as amended, and rules and operational guidelines promulgated by the Committee consistent with such regulations.

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(b)Subject to Section 1.19, a Participant shall accrue Credited Service in accordance with the terms of the Plan for any period for which his benefit payments are suspended.  The benefit to which a Participant is entitled under the Plan shall be recomputed as of the first day of the month following the end of the suspension of benefits by taking into account such additional Credited Service, Compensation, etc. as required by the terms of the Plan and the benefits already paid thereunder, but in no event shall the Benefit payable following the suspension be less than the Benefit to which such Participant was entitled immediately prior to the suspension.

Section 3.12Direct Rollover.

To the extent administratively practicable, a Distributee may elect, at the time and in the manner prescribed by the Committee, to have any portion of an Eligible Rollover Distribution paid directly to an Eligible Retirement Plan specified by the Distributee in a Direct Rollover.  For these purposes, the following definitions apply:

(a)Eligible Rollover Distribution.  An Eligible Rollover Distribution is any distribution of all or any portion of the balance to the credit of the Distributee, except that an Eligible Rollover Distribution does not include any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the Distributee or the joint lives (or joint life expectancies) of the Distributee and the Distributee’s Designated Beneficiary, or for a specified period of 10 years or more; any distribution to the extent that distribution is required under Code Section 401(a)(9); and the portion of any distribution that is not includible in gross income.

(b)Eligible Retirement Plan.  An Eligible Retirement Plan is an individual retirement account described in Code Section 408(a), an individual retirement annuity described in Code Section 408(b), an annuity plan described in Code Section 403(a), or a qualified trust described in Code Section 401(a), that accepts the Distributee’s Eligible Rollover Distribution.  An Eligible Retirement Plan also includes an annuity contract described in Code Section 403(b) and an eligible plan under Code Section 457(b) that is maintained by a state, political subdivision of a state, or any agency or instrumentality of a state or political subdivision of a state, provided the plan agrees to separately account for amounts transferred into such plan from this Plan.  To the extent provided in Section 824 of the Pension Protection Act of 2006, an Eligible Retirement Plan also includes a Roth IRA.

(c)Distributee.  A Distributee includes an Employee or former Employee, and such an Employee’s surviving Spouse or former Spouse who is an alternate payee (under a Qualified Domestic Relations Order) of such an Employee.

(d)Direct Rollover.  A Direct Rollover is a payment by the Plan to the Eligible Retirement Plan specified by the Distributee.

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(e)Non-Spouse Beneficiary.  Effective for Eligible Rollover Distributions (as defined above) to non-Spouse designated beneficiaries for which the Annuity Starting Date (as defined in Code Section 417(e)) is on or after January 1, 2010, the following provisions apply:

(i)Direct Rollover.  Pursuant to procedures established by the Administrative Committee, a Participant’s non-Spouse designated beneficiary, within the meaning of Code Section 401(a)(9), may authorize a direct rollover to an individual retirement account or annuity described in Code Section 408(a) or Code Section 408(b) (collectively referred to as an “IRA”), that is established on behalf of the designated beneficiary and that will be treated as an inherited IRS pursuant to the provisions of Code Section 402(c)(11).

(ii)Required Minimum Distribution.  The determination of any required minimum distribution within the meaning of Code Section 401(a)(9) that is ineligible for rollover will be made in accordance with IRS Notice 2007-7, Q&A 17 and 18.

Section 3.13Payment of Small Amounts.

The Actuarial Equivalent, if $5,000 or less, of any Accrued Benefit payable in respect of a Participant shall be paid in a lump sum in lieu of monthly or other periodic payments.  See update at the end of Appendix II (Distribution Provisions) of this Plan.

(a)For purposes of determining an employee’s accrued benefit under the Plan, the Plan may disregard service performed by the employee with respect to which the employee has received (i) a distribution of the present value of his entire nonforfeitable benefit if such distribution was in an amount (not more than $5,000) permitted under regulations prescribed by the Secretary of the Treasury, or (ii) a distribution of the present value of the employee’s nonforfeitable benefit attributable to such service which he elected to receive.  Clause (i) applies only if such distribution was made on termination of the employee’s participation in the Plan. Clause (ii) applies only if such distribution was made on termination of the employee’s participation in the plan or under such other circumstances as may be provided under regulations prescribed by the Secretary of the Treasury.

(b)For purposes of determining an employee’s accrued benefit under the Plan, the Plan will not disregard service as provided in the preceding paragraph (a) if the employee (i) received a distribution under paragraph (a) which was less than the present value of the Participant’s accrued benefit, the employee resumes employment covered under the Plan, and the employee repays the full amount of such distribution with interest at the rate determined for purposes of subsection 411(c)(2)(C).  Such repayment must be made (I) in the case of a withdrawal on account of separation from service, before the earlier of 5 years after the first date on which the employee is subsequently re-employed by the employer, or the close of the first period of 5 consecutive 1-year breaks in service commencing after the withdrawal; or (II) in the case of any other withdrawal, 5 years after the date of the withdrawal.

(c)This Plan precludes the immediate distribution of any benefit where the present value of the nonforfeitable accrued benefit (taking into account benefits derived from both employer and employee contributions) is in excess of $5,000 without the consent of the Participant and, when applicable, the Participant’s spouse.  For these purposes, an immediate distribution means the distribution of any part of the benefit before the later of age 62 or normal retirement age.

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Section 3.14Special Election Provisions.

(a)Qualified Preretirement Survivor Annuity coverage shall be automatically implemented for each Participant upon attainment of his or her right to a Vested Retirement Benefit or on such other date specified in the regulations prescribed under Section 417(a) of the Code, and shall automatically continue until the Participant dies, is divorced, or his spouse dies.

(b)Notwithstanding any other provision of this Plan, any election by a Participant or Former Participant of a form of benefit payment other than that having the effect of a Statutory Joint and Survivor Annuity described in Section 3.7 shall be effective only if the Participant’s spouse consents to it in writing, such consent is witnessed by a Plan representative designated by the Administrator or a notary public, such election designates a beneficiary (or a form of benefits) which may not be changed without spousal consent (unless the consent of the spouse expressly permits designations by the Participant without any requirement of further consent by the spouse), and the spouse’s consent acknowledges the effect of the election.  Spousal consent shall not be required if the Participant establishes to the satisfaction of the Plan representative that such consent may not be obtained because there is no spouse or the spouse cannot be located.  Any consent shall be effective only with respect to the spouse who gave it.

Section 3.15Distribution of Vested Retirement Benefit.

This Section 3.15 has been replaced by Appendix II (Distribution Provisions).

ARTICLE IV

FUNDING OF BENEFITS

Section 4.1Funding Policy and Method.  The Administrative Committee shall establish a funding policy and method consistent with the objectives of the Plan and the requirements of ERISA.  Participants shall neither be required nor permitted to make contributions under the Plan.

Section 4.2Company Contributions.  The Company shall contribute and pay to the Trustee, to be held and administered in trust, such amounts at such times as shall be required by the funding policy and method established pursuant to Section 4.1 and as shall be in accordance with the rules promulgated by the Administrative Committee pursuant to Section 7.6 in effectuation of such funding policy and method.

Section 4.3Reduction of Company Contributions.  Forfeitures arising under the Plan from termination of employment, death or for any other reason shall not be applied to increase the benefits any person would receive from the Plan prior to termination or the complete discontinuance of Company contributions thereto, but shall instead be used, to the extent not anticipated in determining actuarial costs hereunder, to reduce subsequent Company contributions to the Plan.

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ARTICLE V

TRUST AGREEMENT AND TRUST FUND

Section 5.1Trust Agreement.  Bolsa Chica has entered into a master trust agreement with the Trustee, providing for the administration of the Trust Fund, in such form and containing such provisions as Bolsa Chica has deemed appropriate, including, but not by way of limitation, provisions with respect to the powers and authority of the Trustee, the right of Bolsa Chica to discharge or replace the Trustee at any time, the authority of Bolsa Chica to amend or terminate the master trust agreement and to settle the accounts of the Trustee on behalf of all persons having an interest in the Trust Fund, and a provision that it shall be impossible at any time prior to the satisfaction of all liabilities under the Plan with respect to Participants and their Beneficiaries for any part of the corpus or income of the Trust Fund to be used for or diverted to purposes other than for the exclusive benefit of Participants and their Beneficiaries.  The master trust agreement shall constitute the Trust Agreement for the Plan and shall be a part of the Plan, and the rights and duties of any person under the Plan shall be subject to all applicable terms and provisions of the master trust agreement.

Section 5.2Trust Fund.  The Trust Fund shall be held by the Trustee, pursuant to the terms of the master trust agreement, for the exclusive purposes of providing benefits to Participants and their Beneficiaries and defraying reasonable expenses of administering the Plan, to the extent such expenses are not paid by the Company, and no assets of the Plan shall inure to the benefit of the Company except to the extent permitted by ERISA; provided, however, that any contribution made as a result of erroneous actuarial calculations will be returned within one year from the date of contribution to the Company which made the contribution. No person shall have any interest in or right to any part of the earnings of the Trust Fund, or any right in, or to, any part of the assets thereof, except as and to the extent expressly provided in the Plan and in the master trust agreement.

ARTICLE VI

CERTAIN LIMITATIONS ON BENEFITS

This Article VI has been replaced by Appendix I (Limitations on Benefits).

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ARTICLE VII

PLAN ADMINISTRATION

Section 7.1Establishment of the Administrative Committee.  The general administration of the Plan and the responsibility for carrying out its provisions shall be placed in the Administrative Committee.  If the Company is not serving as the Administrative Committee, the Administrative Committee shall consist of not less than two nor more than seven persons appointed from time to time by the Board of Directors to serve at its pleasure. Any member of the Administrative Committee may resign by delivering his written resignation to Bolsa Chica and the secretary of the Administrative Committee.  The Administrative Committee shall be the Plan Administrator (within the meaning of section 3 of ERISA and section 414(g) of the Internal Revenue Code) with such authority, responsibilities and obligations as ERISA and the Internal Revenue Code grant to and impose upon persons so designated.  For purposes of ERISA, the Administrative Committee shall be a “named fiduciary” under the Plan.

Section 7.2Establishment of the Investment Committee.  The responsibility for the formulation of the general investment practices and policies of the Plan and its related Trust Fund and for effectuating such practices and policies shall be placed in the Investment Committee.  If the Company is not serving as the Investment Committee, the Investment Committee shall consist of not less than three nor more than seven persons appointed from time to time by the Board of Directors to serve at its pleasure. Any member of the Investment Committee may resign by delivering his written resignation to Bolsa Chica and the secretary of the Investment Committee.  For purposes of ERISA, the Investment Committee shall be a “named fiduciary” under the Plan.  Effective September 30, 1993, the Board of Directors or its delegate shall serve as the Investment Committee.

Section 7.3Organization of the Committees.  If the Company is not serving as the Committee, the members of the Committee shall elect a chairman from their number, and shall also elect a secretary who may be but need not be one of the members of the Committee.  No member of a Committee who is also an Employee receiving regular compensation as such shall receive any compensation for his services as a member of such Committee.  No bond or other security shall be required of any member of a Committee in any jurisdiction.  No member of a Committee shall, in such capacity, act or participate in any action directly affecting his own benefits under the Plan other than an action which affects the benefits of Participants generally.

Section 7.4Powers of the Administrative Committee.  The powers of the Administrative Committee shall include, but are not limited to, the following:

(a)appointing such committees with such powers as it shall determine, including an executive committee to exercise all powers of the Administrative Committee between meetings of the Administrative Committee;

(b)determining the times and places for holding meetings of the Administrative Committee and the notice to be given of such meetings;

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(c)employing such agents and assistants, such counsel (who may be counsel to the Company or to Bolsa Chica) and such clerical, medical, accounting and actuarial services or advisers as the Administrative Committee may require in carrying out the provisions of the Plan;

(d)authorizing one or more of their number or any agent to make any payment, or to execute or deliver any instrument, on behalf of the Administrative Committee, except that all requisitions for funds from, and requests, directions, notifications and instructions to the Trustee shall be signed either by two members of the Administrative Committee or by one member and the secretary thereof;

(e)fixing and determining the proportion of expenses of the Plan from time to time to be paid by the Companies and requiring payment thereof;

(f)establishing one or more subcommittees in each location at which Bolsa Chica or any of its subsidiaries or affiliates does business, appointing the members of any such subcommittees, in such number and for such service as the Administrative Committee shall deem appropriate, and delegating any power or duty granted to the Administrative Committee by the Plan to any such subcommittees;

(g)receiving and reviewing reports from the Trustee as to the financial condition of the Trust Fund, including its receipts and disbursements;

(h)executing and filing with the appropriate governmental agencies such registration and other statements, forms, applications, notifications, and other documents or information as the Administrative Committee may from time to time deem appropriate in connection with the Plan;

(i)approving the adoption of the Plan by any subsidiary or affiliate of the Company in accordance with Section 8.4;

(j)amending the Plan to the extent provided in Section 8.1; and

(k)determining all questions concerning eligibility, elections, contributions, and benefits under the Plan, construing all terms of the Plan, including any uncertain terms, and determining all questions concerning administration of the Plan.

Section 7.5Powers of the Investment Committee.  The powers of the Investment Committee shall include, but not be limited to, the following:

(a)directing the Trustee, or appointing one or more investment managers to direct the Trustee, subject to the conditions set forth in the master trust agreement and in paragraph below, in all matters concerning the investment of the Trust Fund;

(b)authorizing one or more of their number or any agent to make any payment, or to execute or deliver any instrument, on behalf of the Investment Committee, except that if the Company is not serving as the Investment Committee all requisitions for funds from, and requests, directions, notifications and instructions to the Trustee shall be signed either by two members of the Investment Committee or by one member and the secretary thereof;

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(c)receiving and reviewing reports from the Trustee as to the financial condition of the Trust Fund, including its receipts and disbursements;

(d)employing such agents and assistants, such counsel (who may be counsel to the Company or to Bolsa Chica) and such clerical, accounting, actuarial and investment services or advisers as the Investment Committee may require in carrying out its responsibilities under the Plan.

Section 7.6Duties of the Administrative Committee.  The Administrative Committee shall have the general responsibility for administering the Plan and carrying out its provisions.  Subject to the limitations of the Plan, the Administrative Committee from time to time shall establish rules for the administration of the Plan and the transaction of its business and shall promulgate such rules as may be necessary to effectuate the funding policy and method established pursuant to Section 4.1.  If the Company is not serving as the Administrative Committee, as to all matters of administration, interpretation and application not reserved to the Company or Bolsa Chica, the determination of the Administrative Committee as to any disputed question shall be conclusive.  Any determination made by the Administrative Committee shall be given deference in the event it is subject to judicial review and shall be overturned only if it is arbitrary and capricious.  It shall be the duty of the Administrative Committee to notify the Trustee in writing of the amount of any benefit which shall be due to any Participant and in what form and when such benefit is to be paid.  The Administrative Committee may at any time or from time to time with respect to a Defined Benefit Plan (as defined in Section 6.1) require the Trustee by a written direction to purchase one or more annuities, in specific amounts, in the names of Participants, their spouses, their contingent annuitants, and/or their beneficiaries from an insurance company designated by the Administrative Committee.

Section 7.7Actions by a Committee.  If the Company is not serving as the Committee, a majority of the members of a Committee at the time in office shall constitute a quorum for the transaction of business at any meeting and resolutions or other actions made or taken by a Committee shall require the affirmative vote of a majority of the members of such Committee attending a meeting, or by a majority of members in office by writing without a meeting.

Section 7.8Actuarial Tables and Studies.  The Administrative Committee shall adopt from time to time such actuarial tables as may be required in connection with the Plan.  As an aid to the Administrative Committee in adopting tables and to the Company in fixing the rates of its contribution payable under a Defined Benefit Plan (as defined in Section 6.1), the actuary (who shall be enrolled by the Joint Board for the Enrollment of Actuaries established under ERISA) designated by the Administrative Committee shall make periodical actuarial studies in relation to such Defined Benefit Plan, and shall recommend tables to the Administrative Committee and rates of contribution to the Company.

Section 7.9Accounts.  The Administrative Committee shall maintain accounts showing the fiscal transactions of the Plan and shall keep in convenient form such data as may be necessary for the effective operation and administration and actuarial valuations of the Plan.

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Section 7.10Discretionary Action.  The Administrative Committee shall have full discretionary authority to administer and interpret the Plan, including discretionary authority to determine eligibility for participation and for benefits under the Plan and discretionary authority to construe ambiguous terms and to correct errors.  The Plan Administrator may delegate its administrative duties.  Any such delegation will carry with it the full discretionary authority of the Plan Administrator to carry out these duties.  Any determination by the Plan Administrator or its delegate will be final and conclusive upon all persons.

Section 7.11Action Taken in Good Faith.  To the extent permitted by ERISA, the members of the Committees, the Company, Bolsa Chica, and their officers and directors shall be entitled to rely upon all tables, valuations, certificates, and reports, if any, furnished by the actuary described at Section 7.8, upon all certificates and reports made by any accountant or by the Trustee, upon all opinions given by any legal counsel selected or approved by a Committee, and upon all opinions given by any investment adviser selected or approved by the Investment Committee, and the members of the Committees, the Company, Bolsa Chica, and their officers and directors shall be fully protected in respect of any action taken or suffered by them in good faith in reliance upon any such tables, valuations, certificates, reports, opinions or other advice of any actuary, accountant, Trustee, investment adviser or legal counsel, and all action so taken or suffered shall be conclusive upon each of them and upon all Participants and Employees.

Section 7.12Indemnification.  To the extent not contrary to ERISA, the Company shall indemnify the Committees, each member of a Committee and any other director, officer or employee of an employer who is designated to carry out any responsibilities under the Plan for any liability, joint and/or several, arising out of or connected with their duties hereunder, except such liability as may arise from their gross negligence or willful misconduct.

Section 7.13Claims Procedure.  See the Plan’s Summary Plan Description, as amended from time to time, for the Plan’s Claims Procedures.  The Administrative Committee has full discretionary authority to adjudicate claims.

Section 7.14RESERVED

Section 7.15Responsibilities of Named Fiduciaries Other than the Committees.  The Trustee shall have such responsibilities with respect to the operation of the Plan as are set forth in the master trust agreement.  Any investment adviser which the Investment Committee may employ pursuant to Section 7.5 shall have the responsibility to direct the Trustee in investing and reinvesting the Trust Fund (or that portion thereof specified by the Investment Committee in the instrument appointing such adviser) and to report the book value and fair market value of each asset in the Trust Fund (or such portion thereof) to the Committees periodically, as such responsibilities may be more fully described in the master trust agreement.

Section 7.16Allocation of Responsibilities.  The description of the responsibilities and powers of the Committees and the description of the responsibilities of the Trustee contained in the foregoing provisions of this Article VII shall constitute, for purposes of ERISA, procedures for allocating responsibilities for the operation and administration of the Plan among named fiduciaries.

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Section 7.17Designation of Persons to Carry Out Responsibilities of Named Fiduciaries.  The Committees, the Trustee and any investment adviser which the Investment Committee may employ pursuant to Section 7.5 may, except as to responsibilities involving management and control of assets held in the Trust Fund, designate one or more other persons to carry out any or all of their respective responsibilities under the Plan, provided that such designation shall be made in writing, filed with the Plan’s records and made available for inspection upon request by any Participant or Beneficiary under the Plan.

ARTICLE VIII

AMENDMENT AND TERMINATION; PARTICIPATION AND WITHDRAWAL BY COMPANIES; PLAN MERGERS

Section 8.1Authority to Amend or Terminate.  Bolsa Chica reserves the right to terminate, or to modify, alter or amend the Plan or the Trust Agreement from time to time to any extent that it may, at its sole and complete discretion, deem advisable including, but without limiting the generality of the foregoing, any amendment deemed necessary to qualify or to ensure the continued qualification of the Plan under the Internal Revenue Code.  The foregoing right shall be exercised only by action of Bolsa Chica, except that the Administrative Committee, by a written instrument, duly executed by a majority of its members, may make (a) any amendment which may be necessary or desirable to ensure the continued qualification of the Plan and its related trust under the Internal Revenue Code or which may be necessary to comply with the requirements of ERISA, or any regulations or interpretations issued by the Department of Labor or the Internal Revenue Service with respect to the requirements of ERISA or the Internal Revenue Code, (b) any amendment which is required by the provisions of any collective bargaining agreement between the Company and its employees and (c) any other amendment which will not involve an estimated annual cost under the Plan (determined at the time of the amendment in a manner consistent with the requirements of ERISA) in excess of $200,000.  No such amendment shall increase the duties or responsibilities of the Trustee without its consent thereto in writing.  No such amendment shall have the effect of diverting the whole or any part of the principal or income of the Trust Fund to purposes other than for the exclusive benefit of Participants and others having an interest in the Plan, prior to the satisfaction of all liabilities with respect to them.  Effective September 30, 1993, all amendments will be in writing and will be signed by an officer of Koll Real Estate Group, Inc. or any successor to Koll Real Estate Group, Inc. that adopts the Plan.  No such amendment shall eliminate or reduce Section 411(d)(6) protected benefits that have already accrued.

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Section 8.2Effect of Termination.  Upon the termination or partial termination of a Defined Benefit Plan rights of all affected Participants to their respective accrued benefits under the Plan shall be nonforfeitable to the extent then funded.  Upon the withdrawal from a Defined Benefit Plan of any Company under circumstances constituting a partial termination of the Plan within the meaning of section 411(d)(3) of the Code, such rights of all affected Participants who are Employees of such Company shall likewise be nonforfeitable to the extent then funded.  In either such event, the Administrative Committee shall (except as provided in Section 8.3) direct the Trustee as to the allocation of the applicable assets of the Defined Benefit Plan, in accordance with the following provisions of this Section 8.2.  After providing for the expenses of the Defined Benefit Plan, the assets remaining in the account of each Company withdrawing from the Defined Benefit Plan shall be used and applied for the benefit of its Employees, former Employees who are Participants, and the beneficiaries of the foregoing in the manner prescribed by section 4044 of ERISA (or corresponding provision of any subsequent applicable law in effect at the time).  The Administrative Committee may require that the benefits accrued hereunder be paid in cash or in the form of immediate or deferred annuities or otherwise as it shall determine.  After such allocation has been made, any residue of such applicable assets of the Defined Benefit Plan may be distributed to such Company if all liabilities of the Plan with respect to its Employees, former Employees who are Participants, and the beneficiaries of the foregoing have been satisfied and the distribution does not contravene any applicable provisions of law.

Whether or not a “partial termination” within the meaning of this Section 8.2 has occurred in any given situation shall be determined by the Administrator in light of existing Internal Revenue Service guidelines and other relevant authorities.  However, in the event of the disposition of a particular business operation, or the shutdown thereof, under conditions which do not constitute a “partial termination”, the Administrator may declare that such disposition or shutdown shall nevertheless be treated as a “partial termination” for purposes of this Plan.  Any such declarations shall be made in a manner which does not discriminate in favor of officers, shareholders or highly compensated individuals.

Section 8.3RESERVED

Section 8.4Participation by Companies.  The Administrative Committee or Bolsa Chica may approve the adoption of the Plan by any subsidiary or affiliate of the Company upon appropriate action by such subsidiary or affiliate.  In such event, or if any individuals become Employees of a Company as a result of the acquisition of all or a part of the assets or business of another company, the Administrative Committee or Bolsa Chica may, subject to the provisions of ERISA and the qualification requirements of the Internal Revenue Code, determine to what extent, if any, credit and benefits shall be granted for previous service with such subsidiary, affiliate or other company.

Section 8.5Withdrawal of a Company.  Any company which is a Company may, by appropriate action taken by it, terminate its participation in the Plan, in which event the applicable provisions of Section 8.2 shall apply; provided, however, that if so directed by the Administrative Committee, the applicable assets of the Plan shall be segregated by the Trustee as a separate trust and the Plan shall be continued as a separate plan for the employees of such company under which the board of directors of such company shall succeed to all the powers and duties of Bolsa Chica hereunder.

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Section 8.6Merger with Other Plans.  The Plan shall not be merged or consolidated with, nor transfer its assets or liabilities to, any other plan unless each Participant would (if the Plan then terminated) receive a benefit immediately after the merger, consolidation or transfer which is equal to or greater than the benefit he would have been entitled to receive immediately before the merger, consolidation or transfer (if the plan had then terminated).

Section 8.7Certain Employee Terminations.  The provisions of this Section 8.7 shall apply whenever, under circumstances which do not constitute a partial termination of the Plan for purposes of Section 8.2, the following events occur:

(a)a company other than a member of the Bolsa Chica Group (as defined in Section 6.1) (such company being hereinafter referred to in this Section 8.7 as the “Acquiring Company”) purchases or otherwise acquires some part or all of the assets or business of a Company and

(b)in connection with such purchase or other acquisition, a group of Participants who are covered by a Defined Benefit Plan or a Defined Contribution Plan (as defined in Section 6.1) (such Participants being hereinafter referred to in this Section 8.7 as the “Transferred Participants”) become employees of the Acquiring Company.

In its sole discretion, the Administrative Committee may determine to vest each such Participant in the full amount of his account in the case of a Defined Contribution Plan or his accrued benefit in the case of a Defined Benefit Plan, and distribute his interest in the Trust Fund, as so determined, in accordance with the appropriate provisions of the Plan.  In the alternative, in the case of a Defined Contribution Plan, after distribution to each Transferred Participant in such plan of the vested portion of his account, any remaining balance of the account of each such Transferred Participant shall be held as a separate account in his name until such time as the Administrative Committee shall determine, on the basis of evidence satisfactory to it, either that (i) such Transferred Participant has completed a period of continuous service with the Acquiring Company which, when added to his Vesting Service, is equal to five years or (ii) such Transferred Participant’s employment by the Acquiring Company has been terminated prior to his completion of such a period of continuous service.  Subject to the provisions of such Defined Contribution Plan regarding the manner and time of payment under the plan, if the Administrative Committee makes the determination referred to in clause (i) of the preceding sentence with respect to any such Transferred Participant, the amount held in the separate account in his name shall thereafter be distributed to him in full; if the Administrative Committee makes the determination referred to in clause of the preceding sentence with respect to any such Transferred Participant, the amount theretofore held in the separate account in his name shall be forfeited as of the last day of the plan year during which such determination shall have been made, and the amount so forfeited shall be applied in accordance with the forfeiture provisions of the Defined Contribution Plan.

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Section 8.8Suspension of Contributions.  A Company shall have the right to suspend its contributions to the Plan at any time for a fixed period of time, and such period shall be extended by subsequent action of such Company.  Such suspension shall not automatically become a discontinuance of contributions as under Section 8.2 until the time at which in the opinion of the Plan Enrolled Actuary such suspension affects the benefits to be paid or made available under the Plan.  No such suspension shall be allowed to create an “accumulated funding deficiency” under Section 302(a)(2) of ERISA, unless the Plan is then terminated under Section 8.2; provided that in the event of an unintentional creation of an accumulated funding deficiency, the Companies shall have 90 days after such a deficiency is finally determined to correct it without such termination.  In the event of such suspension the Plan shall otherwise remain in full force and effect.

Section 8.9Consolidation or Merger of Bolsa Chica.  In the event of the consolidation or merger of Bolsa Chica with or into any other corporation, or the sale by Bolsa Chica of substantially all of its assets, the resulting successor may continue the Plan by adopting the same by resolution of its board of directors and by executing a proper supplemental agreement to the master trust agreement with the Trustee.

If within ninety days from the effective date of such consolidation, merger or sale of assets, such new corporation does not adopt the Plan, the rights of all affected Participants to their respective accrued benefits under the Plan shall be nonforfeitable to the extent funded as of the effective date of such consolidation, merger or sale of assets.

ARTICLE IX

TOP-HEAVY PROVISIONS

See Appendix III for the Plan’s Top-Heavy Provisions.

ARTICLE X

GENERAL PROVISIONS

Section 10.1Administration.  Effective September 30, 1993, Koll Real Estate Group, Inc. or any successor to Koll Real Estate Group, Inc. that adopts this Plan will serve as the Administrator.

Section 10.2Source of Payment.  Benefits under this Plan shall be payable out of the Trust Fund or, in the case of a Defined Benefit Plan (as defined in Section 6.1), through the use of annuity contracts purchased with assets of the Trust Fund, and neither Bolsa Chica, nor any Company shall have any obligation, responsibility or liability to make any direct payment of benefits due under the Plan.  Neither Bolsa Chica, nor any Company nor the Trustee makes any guarantee to Participants against the loss or depreciation in value of the Trust Fund or guarantees the payment of any benefits hereunder.  No person shall have any right under the Plan with respect to the Trust Fund, or against the Trustee, Bolsa Chica, or any Company, except as specifically provided herein or in ERISA.

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Section 10.3Payment of Expenses.  All expenses that shall arise in connection with the administration of this Plan and the master trust agreement, including, but not limited to, the compensation of the Trustee and of any actuary, accountant, counsel, investment adviser, other expert or other person who shall be employed by a Committee in connection with the administration or investment thereof, shall be paid from the Trust Fund or by the Companies; provided, however, that no person who is employed full-time by any Company shall receive any compensation from the Plan except for reimbursement of expenses properly and actually incurred.

Section 10.4No Right to Employment.  Nothing herein contained shall be deemed to give an Employee the right to be retained in the service of his employer or to interfere with the rights of his employer to discharge him at any time.

Section 10.5Inalienability of Benefits.  Except as may be otherwise provided by applicable law or pursuant to a qualified domestic relations order as defined in section 414(p) of the Internal Revenue Code, benefits provided under this Plan shall not, prior to the actual receipt thereof by the person entitled thereto, be subject in any manner to anticipation, assignment, alienation, sale, transfer, pledge, encumbrance, charge, attachment, garnishment, execution, levy or other legal or equitable process, whether voluntary or involuntary, and any attempt to anticipate, assign, alienate, sell, transfer, pledge, encumber, charge, attach, garnish, execute or levy upon or otherwise dispose of any right to benefits hereunder shall be void.  The Fund shall not in any manner be liable for, or subject to, the debts, contracts, liabilities, engagements or torts of any person entitled to benefits hereunder.

Section 10.6Return of Company Contributions.  Contributions by the Company are expressly conditioned upon the (i) initial qualification of the Plan under section 401 of the Internal Revenue Code of 1986, as amended, and (ii) deductibility of such contributions under section 404 of the Internal Revenue Code of 1986, as amended.  Contributions shall be returned to the Company within one year after (a) the date of denial of the initial qualification of the Plan, (b) the disallowance of a deduction, but only to the extent the deduction is disallowed, or (c) the payment of a contribution by mistake of fact.

Section 10.7Payment Due an Incompetent.  If the Administrative Committee determines that any person to whom a payment is due hereunder is unable to care for his affairs because of physical or mental disability or because he is under 18 years of age, it shall have the authority to cause payments becoming due to such person to be made to another for his benefit, without responsibility of the Administrative Committee or the Trustee to see to the application of such payments, and any payment made pursuant to such authority shall, to the extent thereof, operate as a complete discharge of the obligations of the Company, the Administrative Committee, the Trustee and the Trust Fund.

Section 10.8Missing Recipients.  In the event any amount shall become payable hereunder to a Participant, retired Participant, contingent annuitant, Beneficiary or the legal representative of any of the foregoing and if after written notice from the Administrative Committee sent by registered mail to such person’s last known address as shown in the Administrative Committee’s records and such other due diligence as the Administrative Committee deems appropriate, such person or his personal representative shall not have

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presented himself to the Administrative Committee within five years after the mailing of such notice, then the Administrative Committee may determine that such person’s interest in the Plan has terminated and the amounts otherwise payable shall be forfeited and shall be reapplied in accordance with Article IV of the Plan; provided, however, that if such person presents himself after the expiration of the aforesaid period and provides proper identification satisfactory to the Administrative Committee, then such person’s forfeited benefit shall be reinstated and benefits determined in accordance with Article III shall commence to be paid.  Unless required by law, in no event shall benefits under the Plan be paid retroactively for the period during which such benefits were payable but unclaimed.

Section 10.9Errors in Payment.  If any error shall result in the payment to any Participant or other person of more or less than he would have received but for such error, the Administrative Committee shall be authorized to correct such error and to adjust the payments as far as possible in such manner that the actuarial equivalent of the benefits to which such Participant or other person was correctly entitled shall be paid.  In the event of an overpayment, the Plan may pursue other lawful means of recovering such overpayment.

Section 10.10Multiple Defined Benefit Plans.  Notwithstanding Section 8.8.3, in the event a group of Employees who are Participants in a Defined Benefit Plan (as defined in Section 6.1) shall become covered by another Defined Benefit Plan established by the Bolsa Chica Group (as defined in Section 6.1), the Company may authorize the Administrative Committee to direct the Trustee to pay over and deliver to the trustee of such other plan such of the assets of the original Defined Benefit Plan as the Administrative Committee may determine, but in no event shall the assets so transferred exceed that proportion of the original Defined Benefit Plan’s assets which the actuarially determined liability for the accrued benefit credited to the Employees of such group (on a termination basis) bears to the liability for all accrued benefits thereunder (on a termination basis).

Section 10.11Notices, etc.

(a)By Employee.  Wherever provision is made in the Plan for the filing of any notice, application, election or designation, such action shall, except where expressly provided herein to the contrary, be evidenced by the execution of such form, and on such notice, as the Administrative Committee may specify for the purpose and shall be effective upon receipt unless the Plan otherwise provides.

(b)To Employee.  Any communication, statement, or notice addressed to any Employee or claimant at his latest post office address as filed with the Company or the Administrative Committee will, on deposit in the United States mail with postage prepaid, be binding upon such Employee or claimant for all purposes of the Plan and, Subject to Section 10.8, neither the Trustee nor the Company shall be obligated to undertake a search to ascertain the whereabouts of any Employee or claimant.

Section 10.12Multiple Capacities.  Any person or group of persons may serve in more than one fiduciary capacity with respect to the Plan.

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Section 10.13Severability.  In case any provisions of this Plan shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining provisions of the Plan, but shall be fully severable, and the Plan shall be construed and enforced as if the illegal or invalid provisions had never been inserted in the Plan.

Section 10.14Construction.  The Plan shall be construed and enforced according to the laws of the State of California (without regard to its choice of law principles) except to the extent otherwise required by ERISA or necessary for qualification under the Internal Revenue Code.  Headings of Articles, Sections and Subsections herein contained are included solely for convenience of reference, and if there be any conflict between such headings and the text hereof, the text shall control.  It is intended that the Plan in all respects conform to and be administered and interpreted in a manner consistent with the requirements of ERISA and the requirements for qualification under the Internal Revenue Code.  Accordingly, any provision required to be included herein, in order that the Plan so conform, shall be deemed to be included in the Plan, whether or not expressly set forth.

Section 10.15Special Transitional Rules in Connection with the Spinoff.  It is the intent of the following transitional rules that this Plan be interpreted as assuring the uninterrupted continuation of the provisions of the Predecessor Plan for Employees of the Company who were or would have been eligible to participate in such plan before the Spinoff.  (Nevertheless, the Company reserves the right to amend this Plan as provided herein so long as no such amendment adversely affects benefits accrued by such Employees prior to the effective date of amendment.)  Therefore, subject to the exclusions set forth in Section 1.26, the term “Employee” as used in this Plan shall include any person who was employed during the period from January 1, 1986 through May 27, 1986 by Henley or a business that became a division or subsidiary of Henley in connection with the Spinoff.  The term “Company”, as used in this Plan shall include, for periods prior to the effective date of the Spinoff, Henley and any business that became a subsidiary or division of Henley in connection with the Spinoff that was previously a Company within the meaning of Section 1.14 of the Predecessor Plan.  In addition, subject to the transfer of sufficient assets under section 414(1) of the Code from the trust under the Predecessor Plan to the Trust Fund, the accrued benefit under this Plan as of January 1, 1986 of each Employee of the Company who was a Participant in the Predecessor Plan on December 31, 1985 shall be equal to his accrued benefit, on a termination basis, determined as of such date under the provisions of the Predecessor Plan as then in effect.

Section 10.16Additional Special Transitional Rule in Connection with Spinoffs of Henley and The Fisher Scientific Group Inc.

(a)Any Employee who was a participant in the Predecessor Plan on December 31, 1985 and transferred to employment with the Company directly from employment by Allied-Signal or its subsidiaries on or before June 1, 1987 shall, subject to the transfer as of January 1, 1986 of all assets allocable to such Employee from the trust under the Predecessor Plan to the Trust Fund, be deemed for all purposes under the Plan to have commenced employment with the Company as of January 1, 1986.

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(b)Any Employee who was a participant in the Predecessor Plan on December 31, 1985 and transferred to employment with The Fisher Scientific Group Inc., directly from employment with Allied-Signal or its subsidiaries on or before June 1, 1987 shall, subject to the transfer as of January 1, 1986 of all assets allocable to such Employee from the trust under the Predecessor Plan to the Trust Fund, be deemed for all purposes under the Plan to have commenced employment with the Company as of January 1, 1986.

Section 10.17Military Service.  Notwithstanding any provision in this Plan to the contrary, contributions, benefits and service credit with respect to qualified military service will be provided to the extent required by Code Section 414(u).  If a Participant dies on or after January 1, 2007, while performing qualified military service (as defined in Code Section 414(u)), the survivors of that Participant are entitled, to the extent required by Code Section 401(a)(37), to any additional benefits (other than benefit accruals relating to the period of qualified military service) provided under the Plan had the Participant resumed and then terminated employment on account of death.

ARTICLE XI

SPECIAL PROVISIONS RELATING TO THE CUTBACK OF OPERATIONS AT THE HAMPTON LOCATION

Section 11.1Applicability.  The provisions of this Article XI shall be applicable to each Participant or Former Participant in the Plan (a) who was actively employed on December 31, 1985 in the Signal Engineered Products Group, (b) whose regular place of employment on or after December 31, 1985 was the Hampton office of the Company, regardless of whether such Participant may thereafter be transferred to another location, and (c) who, on or before July 1, 1986, agreed to a date for the involuntary termination of his employment in connection with the Allied-Signal Inc. Streamlining Program.  The Participants and Former Participants to whom this Article XI is applicable shall hereinafter be referred to as “Hampton Participants.”

Section 11.2Full Vesting.  Notwithstanding any other provision of the Plan, each Participant or Former Participant (a) who was actively employed on December 31, 1985 in the Signal Engineered Products Group and (b) whose regular place of employment on or after December 31, 1985 was the Hampton office of the Company, regardless of whether such Participant may thereafter be transferred to another location, shall be fully vested in his Accrued Benefit.

Section 11.3Special Rules Pertaining to Hampton Participants Electing to Receive Periodic Salary Continuation Payments.  In the case of any Hampton Participant who elects, in connection with the Allied-Signal Inc. Streamlining Program and in accordance with procedures established by the Administrator, to receive periodic salary continuation payments rather than lump-sum salary continuation payments, the following rules shall apply:

(a)no such Hampton Participant shall be deemed to have Separated from the Service until the last day of the final period to which his or her periodic salary continuation payments relate (which date shall, for the purpose of this Article, be referred to hereinafter as his or her “Severance from Service Date”); and

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(b)the Compensation of each such Hampton Participant shall, for all purposes under the Plan, be deemed to include such periodic salary continuation payments.

Section 11.4Special Rules Pertaining to Hampton Participants Electing to Receive Salary Continuation.  In the case of any Hampton Participant who is not, as of his Severance from Service Date, eligible to receive the immediate payment of any Early or Normal Retirement Benefit under the Plan and who, in connection with the Allied-Signal Inc. Streamlining Program and in accordance with procedures established by the Administrator, elects to receive periodic or lump-sum salary continuation, the following rules shall apply:

(a)if such Hampton Participant’s Severance from Service Date, determined in accordance with Section 12.3(a) or in accordance with the other provisions of the Plan, whichever is applicable, is less than or equal to two years before the earliest date that such Hampton Participant could have designated as his Early Commencement Date under the Plan, such Hampton Participant, for the purpose of determining his Credited Service (and for no other purpose under the Plan), shall be deemed to remain an Employee of the Company until the earlier of (i) his death and (ii) the earliest date that could have been designated as his Early Commencement Date; and

(b)if such Hampton Participant’s Severance from Service Date, determined in accordance with Section 12.3(a) or in accordance with the other provisions of the Plan, whichever is applicable, is less than or equal to three years before the earliest date on which such Hampton Participant would have been eligible to receive an unreduced Retirement Benefit, such Hampton Participant shall, for the purpose of determining his Credited Service (and for no other purpose under the Plan), be deemed to remain an Employee of the Company until the earlier of (i) his death and (ii) the earliest date on which he would have been eligible to receive an unreduced Retirement Benefit.

Section 11.5Special Rules Pertaining to Hampton Participants Electing to Receive “5+5” Benefits.  In the case of any Hampton Participant who is eligible for and elects, in accordance with procedures established by the Administrator, to receive “5+5” benefits rather than periodic or lump-sum salary continuation, the following rules shall apply upon such Hampton Participant’s Separation from the Service:

(a)notwithstanding any other provision of this Plan, five years shall be added to such Hampton Participant’s Credited Service under the Plan; and

(b)five years shall be added to such Hampton Participant’s age, solely for the purposes of (i) the determination of eligibility for Early or Normal Retirement Benefits under the Plan and (ii) the determination of the amount, if any, of applicable early reduction factors.

Section 11.6Additional Special Rule Pertaining to Hampton Participants.  Notwithstanding any other provision of the Plan, the Benefits of Hampton Participants shall not be reduced to cover the cost of Qualified Preretirement Survivor Annuity coverage.

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ARTICLE XII

SPECIAL PROVISIONS RELATING TO THE CUTBACK OF OPERATIONS AT THE LA JOLLA LOCATION

Section 12.1Applicability.  The provisions of this Article XII shall be applicable to each Participant or Former Participant in the Plan (a) who was actively employed on September 30, 1985 by any member of the controlled group of corporations of which Allied-Signal Inc. was a member on the date immediately preceding the Spinoff and (b) whose regular place of employment on or after June 30, 1985 was the La Jolla office of the Company, regardless of whether such Participant may thereafter be transferred to another location.  The Participants to whom this Article XII is applicable shall hereinafter be referred to as “La Jolla Participants.”

Section 12.2Full Vesting.  Notwithstanding any other provision of the Plan, each La Jolla Participant shall be fully vested in his Accrued Benefit.

Section 12.3Special Rules Pertaining to La Jolla Participants Electing to Receive Periodic Salary Continuation Payments.  In the case of any La Jolla Participant who, in connection with the cutback of operations at the La Jolla location, elects, in accordance with procedures established by the Administrator, to receive periodic salary continuation payments rather than a lump-sum salary continuation payment, the following rules shall apply:

(a)no such La Jolla Participant shall be deemed to have Separated from the Service until the last day of the final period to which his or her periodic salary continuation payments relate (which date shall, for the purpose of this Article, be referred to hereinafter as his or her “Severance from Service Date”); and

(b)the Compensation of such La Jolla Participant shall, for all purposes under the Plan, be deemed to include such periodic salary continuation payments.

Section 12.4Special Rules Pertaining to La Jolla Participants Electing to Receive Salary Continuation.  In the case of any La Jolla Participant who is not, as of his Severance from Service Date, eligible to receive the immediate payment of any Early or Normal Retirement Benefit under the Plan and who, in connection with the cutback of operations at the La Jolla location, elects, in accordance with procedures established by the Administrator, to receive periodic or lump-sum salary continuation, the following rules shall apply:

(a)if such La Jolla Participant’s Severance from Service Date, determined in accordance with Section 12.3(a) or in accordance with the other provisions of the Plan, whichever is applicable, is less than or equal to two years before the earliest date that such La Jolla Participant could have designated as his Early Commencement Date under the Plan, such La Jolla Participant, for the purpose of determining his Credited Service (and for no other purpose under the Plan), shall be deemed to remain an Employee of the Company until the earlier of (i) his death and (ii) the earliest date that could have been designated as his Early Commencement Date;

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(b)if such La Jolla Participant’s Severance from Service Date, determined in accordance with Section 12.3(a) or in accordance with the other provisions of the Plan, whichever is applicable, is less than or equal to three years before the earliest date on which such La Jolla Participant would have been eligible to receive an unreduced Retirement Benefit, such La Jolla Participant shall, for the purpose of determining his Credited Service (and for no other purpose under the Plan), be deemed to remain an Employee of the Company until the earlier of (i) his death and (ii) the earliest date on which he would have been eligible to receive an unreduced Retirement Benefit.

Section 12.5Special Rules Pertaining to La Jolla Participants Electing to Receive “5+5” Benefits.  In the case of any La Jolla Participant who, in connection with the cutback of operations at the La Jolla location, elects, in accordance with procedures established by the Administrator, to receive “5+5” benefits rather than periodic or lump-sum salary continuation, the following rules shall apply upon such La Jolla Participant’s Separation from the Service:

(a)notwithstanding any other provision of this Plan, five years shall be added to such La Jolla Participant’s Credited Service under the Plan; and

(b)five years shall be added to such La Jolla Participant’s age, solely for the purposes of (i) the determination of eligibility for Early or Normal Retirement Benefits under the Plan and (ii) the determination of the amount, if any, of applicable early reduction factors.

Section 12.6Special Rule Pertaining to the Calculation of Normal Retirement Benefits.  Solely for the purpose of calculating Normal Retirement Benefits payable under the Plan to La Jolla Participants, the term “April 1, 1971” appearing in subsection 3.2(b)(iii) of the Plan (prior to its January 1, 1989 amendment and restatement) shall be deemed to read “July 1, 1971.”

ARTICLE XIII

ADDITIONAL SPECIAL RULES

Section 13.1Special Rules for Employees of Schweizer Dipple, Inc.

For purposes of determining the Vesting Service of any person who was an active employee of Schweizer Dipple, Inc. on July 1, 1984, and for determining his or her eligibility for benefits under the Plan (including eligibility for early retirement or disability benefits), but not for purposes of determining the amount of such benefits, periods beginning at the later of such employee’s actual commencement of employment with Schweizer Dipple, Inc. or June 16, 1978 shall be taken into account.  For purposes of determining the amount of any benefit under the Plan, Credited Service shall not include periods prior to July 1, 1984.

Section 13.2Special Rules for Certain Employees of Signal Capital Corporation.

(a)The following rules shall apply to each person who (i) was actively employed by Equilease Corporation on December 31, 1987, (ii) was a member of the Pension Plan for Salaried Employees of Equilease and Prestolite Wire (the “Equilease Plan”) on December 31, 1987, (iii) was actively employed by Equilease Corporation on January 1, 1987, and (iv) became an employee of Signal Capital Corporation as of January 1, 1988.  The persons described in the foregoing sentence shall hereinafter be referred to as “Transferred Equilease Employees.”

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(b)Each Transferred Equilease Employee shall be a Participant in this Plan as of January 1, 1988.

(c)The Credited Service of each Transferred Equilease Employee shall include all of such Transferred Equilease Employee’s credited service as of December 31, 1987 under Section 1.14 of the Equilease Plan.

(d)The Vesting Service of each Transferred Equilease Employee shall include all of such Transferred Equilease Employee’s eligibility service as of December 31, 1987 under Section 1.17 of the Equilease Plan.

(e)The benefit of a Transferred Equilease Employee shall be calculated in the manner set forth in Section 8.8.3 of this Plan, to the extent that such Transferred Equilease Employee is entitled to receive a benefit from the Equilease Plan.  The foregoing sentence shall not apply if all assets allocable to such employee are transferred from the trust under the Equilease Plan to the Trust Fund prior to the calculation of such Transferred Equilease Employee’s benefit hereunder.

(f)Subject to the transfer of all assets allocable to a Transferred Equilease Employee from the trust under the Equilease Plan to the Trust Fund, such Transferred Equilease Plan to the Trust Fund, such Transferred Equilease Employee shall be entitled to a minimum vested benefit under this Plan equal or equivalent to his accrued benefit as of December 31, 1987 under the Equilease Plan, determined as of such date under the provisions of the Equilease Plan as then in effect and shall be entitled to the payment of such benefit in accordance with the provisions of the Equilease Plan as in effect on December 31, 1987.  No Transferred Equilease Employee shall be entitled to receive any other benefit except in accordance with the terms of this Plan.

(g)No benefit payable pursuant to this Section 13.2 shall duplicate any benefit payable under the Equilease Plan.

Section 13.3Special Rules Applicable to Certain Former Employees of Equilease Corporation.

(a)The following rules shall apply to each Person who was (i) a retired member or terminated vested member of the Pension Plan for Salaried Employees of Equilease and Prestolite Wire (the “Equilease Plan”) on December 31, 1987, or who (ii) was a member of the Equilease Plan on December 31, 1987, is not a Transferred Equilease Employee described in the preceding section and was as of January 1, 1988 a “commuter” employee at the Hampton facility of the Company or receiving salary continuation in connection with the shutdown of Equilease Corporation’s operations.  The persons described in the foregoing sentence shall hereinafter be referred to as “Former Equilease Employees”.

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(b)Subject to the transfer from the trust under the Equilease Plan to the Trust Fund of all Equilease Plan assets allocable to the Former Equilease Employees,

(i)each retired Former Equilease Employee shall receive from the Plan the benefit to which he was entitled as of December 31, 1987 under the terms of the Equilease Plan as in effect on that date, payable in accordance with the terms of the Equilease Plan as in effect on that date,

(ii)each terminated vested Former Equilease Employee shall be entitled to receive from the Plan a benefit equal or actuarially equivalent to his accrued benefit as of December 31, 1987 under the Equilease Plan, payable in accordance with the terms of the Equilease Plan as in effect on that date, and

(iii)the benefit under the Plan of each Former Equilease Employee who continues to work at the Hampton location as a “commuter” employee or receives salary continuation shall be calculated and payable in accordance with the terms of the Equilease Plan as in effect on December 31, 1987, including credited service under section 1.14 of the Equilease Plan for periods of “commuter” employment and salary continuation.

(c)No benefit payable pursuant to this Section 13.3 shall duplicate any benefit payable under the Equilease Plan.

Section 13.4Additional Special Rules Applicable to Certain Employees of Signal Capital Corporation.

(a)The rules set forth in this subsection 13.4(a) shall apply to each Employee of Signal Capital Corporation who became an Employee in connection with the December 12, 1985 acquisition of assets of First City Financial Corporation (“FCFC Employees”).  For purposes of determining each FCFC Employee’s eligibility to participate, Credited Service and Vesting Service under the Plan, periods of employment prior to January 1, 1986 with FCFC or with any member of the controlled group of corporations of which FCFC was a member at the time of such employment shall be taken into account.

(b)The rules set forth in this subsection 13.4(b) shall apply to each Employee of Signal Capital Corporation who became an Employee in connection with the May 22, 1986 acquisition of assets of First Asset-Based Lending (“FABL Employees”).  For purposes of determining each FABL Employee’s  Vesting Service and eligibility to participate in the Plan, periods of employment prior to May 22, 1986 with FABL, but not periods of service with First National Bank and Trust Company of Oklahoma City or First Oklahoma Bank Corporation, Inc., shall be taken into account.

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ARTICLE XIV

SPECIAL PROVISIONS RELATING TO FORMER PARTICIPANTS IN THE ENGINEERING RESEARCH, INCORPORATED RETIREMENT PLAN FOR SALARIED EMPLOYEES AND THE ENGINEERING RESEARCH, INC. HOURLY EMPLOYEES PENSION PLAN

Section 14.1General.

(a)Effective January 1, 1984, Engineering Research, Incorporated (“ERI”) established the Engineering Research, Incorporated Retirement Plan for Salaried Employees (the “ERI Salaried Plan”) to provide retirement benefits for salaried employees of ERI.  The Engineering Research, Inc. Hourly Employees Pension Plan (the “ERI Hourly Plan” and, together with the ERI Salaried Plan, the “ERI Plans”) was established effective January 1, 1984 to provide retirement benefits for certain hourly employees of ERI.  On February 27, 1987, substantially all of the assets of ERI were sold to Babcock and Wilcox (“B&W”).  In connection with the sale, benefit accruals under the ERI Plans were frozen as of February 27, 1987, and offers of employment were made to plan participants by B&W.  Effective December 31, 1988, the ERI Plans were merged with this Plan, and participants in the ERI Plans became participants in this Plan for the limited purpose of receiving their benefits accrued under the ERI Plans.  Subject to this Plan’s provisions of general applicability (including such provisions that are legally required), former participants in the ERI Salaried Plan (“ERI Salaried Participants”) and former participants in the ERI Hourly Plan (“ERI Hourly Participants” and, together with ERI Salaried  Participants, “ERI Participants”) shall be entitled to benefits under this Plan only as set forth in this Article XIV, unless any such ERI Participant qualifies for participation in the Plan other than pursuant to this Article XIV.  Except as otherwise provided in this Article XIV, the rights and obligations of each person covered by an ERI Plan who retired, or whose employment was otherwise terminated prior to December 31, 1988, shall be governed by the applicable provisions of the ERI Plans as in effect on such person’s retirement or termination date.  Effective January 1, 1990, all assets allocable to the benefits of ERI Participants were transferred to the trust established under The Henley Group, Inc. Retirement Plan.  No benefits under this Plan shall duplicate benefits payable under that plan.

(b)For purposes of this Article XIV, unless otherwise indicated, the term “Company” shall mean the Company as defined in Section 1.14, ERI, B&W and their respective affiliates required to be treated as under common control with such entities pursuant to section 414(b),(c),(m) or (o) of the Code.

Section 14.2Participation.  A person who was a participant or former participant in either ERI Plan on December 31, 1988 shall become an ERI Participant in this Plan for purposes of receiving the benefits described in this Article, effective December 31, 1988.

Section 14.3ERI Salaried Participants.

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Section 14.3.1Continuous Service.

(a)The Continuous Service of an ERI Salaried Participant shall for purposes of this Article XIV be the sum of his Pre-February 28, 1987 Service and his Post-February 27, 1987 Service.

(b)Pre-February 28, 1987 Service.  The Pre-February 28, 1987 Service of an ERI Salaried Participant shall be equal to his Continuous Service accrued under Section IX(1) of the ERI Salaried Plan as of February 27, 1987.

(c)Post-February 27, 1987 Service.  The Post-February 27, 1987 Service of an ERI Salaried Participant shall consist of such ERI Salaried Participant’s service with the Company after February 27, 1987 until such service is interrupted by (i) Discharge for cause, (ii) quitting by the employee or (iii) retirement.  If an ERI Salaried Participant’s service is terminated and such Participant is subsequently rehired by the Company, the duration of service up to such termination will be reinstated.

Periods of absence from work, other than those which break continuity of service as provided in the preceding paragraph, will be counted in determining length of continuous service except when the total period of absence of an ERI Salaried Participant in any consecutive twelve (12) month period exceeds twelve (12) months.

Section 14.3.2Retirement.

(a)An ERI Salaried Participant who is employed by the Company, upon attaining the age of 65 years, or at any time thereafter, may request retirement, and will be retired.

(b)An ERI Salaried Participant with 10 or more years of Continuous Service who is employed by the Company, upon attaining the age of 60 years, or at any time thereafter, may request retirement, and will be retired.

(c)An ERI Salaried Participant not eligible for a pension under Section 14.3.2(a), (b) or (d) hereof, whose employment is to be terminated, shall be entitled to elect to be pensioned on the first of the month following such termination provided:

(i)the ERI Salaried Participant’s age and number of years of Continuous Service, when added together, equal or exceed 80; or

(ii)the ERI Salaried Participant has completed at least 15 years of Continuous Service and would have been eligible for a pension under Section 14.3.2(a), (b) or (e) within the next 10 years if employment with the Company had continued.

(d)Notwithstanding any other provisions of the Plan, an ERI Salaried Participant upon attaining the age of 65 years shall, prior to actual retirement or termination of employment, begin receiving pension benefits under this Article XIV on the first of the month following attainment of such age.

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(e)Regardless of age, any ERI Salaried Participant with at least 10 years of Continuous Service who shall have become permanently incapacitated through some unavoidable cause while employed by the Company will be retired.

An ERI Salaried Participant shall be “permanently incapacitated” only if (i) the ERI Salaried Participant has been totally disabled by bodily injury or disease while actively employed so that the ERI Salaried Participant cannot regularly engage in any substantial, full-time activity for compensation or profit, (ii) such disability shall have continued for at least three consecutive months, and (iii) in the opinion of a licensed practicing physician, such disability will be continuous throughout the ERI Salaried Participant’s life.

For the purposes of retirement with pension under this Plan, incapacity shall not be deemed to have resulted from an unavoidable cause if such incapacity is occasioned by self-inflicted injury, or as a result of participating in a criminal activity.

A pension because of permanent incapacity under clause of this Section 14.3.2 shall continue only so long as the pensioner shall be permanently incapacitated, and the Administrator may require an individual pensioned under this clause to submit to a medical examination at any reasonable time by a licensed practicing physician.

A pensioner will be conclusively presumed to be regularly engaged in substantial, full-time activity for compensation or profit, and therefore no longer permanently incapacitated, if the pensioner engages in any activity for compensation or profit from which the pensioner derives income, the annual amount of which, together with the amount of any pension received from the Company, exceeds the annual compensation the ERI Salaried Participant would presently receive if the employee were still employed on the job held at the time the employee was disabled.

Section 14.3.3Amount and Payment of Pension.

Subject to the provisions of Section 14.3.2(d) regarding commencement of benefits, an ERI Salaried Participant meeting the eligibility requirements will be entitled to receive a pension each month beginning with the month following that in which retirement takes place and ending with the month in which the ERI Salaried Participant dies.  The amount of such pension will be determined as follows:

(a)If an ERI Salaried Participant is retired under the provisions of Section 14.3.2(a) or (d), or is entitled to pension benefits under the provisions of Section 14.3.2(d), the ERI Salaried Participant’s pension shall be equal to the greater of (i) or (ii) below:

(i)1.1% of the average monthly pay received during the highest paid five of the last ten calendar years of employment with ERI (ending on or before February 27, 1987) multiplied by his number of years of Pre-February 28, 1987 Service;

(ii)$100.00.

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If it will result in a higher pension, however, an ERI Salaried Participant whose Pre-February 27, 1987 Service ceased to accrue before December 31 of any calendar year will, for the purpose of determining such average monthly pay, be given the benefit of earnings in the year such service ceased in lieu of earnings during an equivalent portion of the earliest of such highest paid five years, provided that no amounts earned after February 27, 1987 shall be taken into account.

(b)If an ERI Salaried Participant is retired under the provisions of Section 14.3.2(b) or (c), the ERI Salaried Participant’s pension will be calculated in accordance with the formula set forth in Section 14.3.3(a) above, and then reduced by 5/9 of 1% for each of the first 60 months by which the pension commencement date precedes the calendar month following the ERI Salaried Participant’s 65th birthday, plus 5/18 of 1% for each additional month by which the pension commencement date precedes the calendar month following the ERI Salaried Participant’s 65th birthday.

(c)Any amount paid to or on behalf of any pensioner as reimbursement for loss of earnings resulting from occupational injury or disease for which the Company (which term for purposes of this subsection 14.3.3(c) shall mean the Company as defined in Section 1.14, ERI, and their respective affiliates required to be treated as under common control with them pursuant to section 414(b), (c), (m) or (o) of the Code) is liable, whether pursuant to Workmen’s Compensation or occupational disease laws, or arising otherwise from the statutory or common law (except fixed statutory payment for the permanent total or partial loss of one or any bodily member, and except for payments for medical expenses) and any disability payment in the nature of a pension under any Federal or State law shall be deducted from or charged against the amount of any pension payable under this Section 14.3.3.  However, Social Security payments and allowances for disabilities incurred in the military service of the United States will not be so deducted or charged.

(d)The Administrator shall pay in a lump sum any pension having a present value of $5,000 or less.  The lump sum payment to an ERI Salaried Participant will be the monthly pension payable at the later of age 65 or pension commencement age multiplied by the factor from Column A for the age of the ERI Salaried Participant when the lump sum benefit will be paid.  The lump sum payment to an ERI Salaried Participant’s surviving spouse will be the spouse’s monthly pension multiplied by the factor from Column B for the age of the spouse at the date the spouse’s pension will commence, and further multiplied by the ratio of the factor in Column A for the age of the spouse at the ERI Salaried Participant’s death to the factor in Column A for the age of the spouse at the date the spouse’s pension will commence (or age 65 if age 65 is earlier than such commencement age).

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Age	Column A	Column B	Age	Column A	Column B
75 & over	77	77	54	43	134
74	80	80	53	41	140
73	82	82	52	38	141
72	85	85	51	36	145
71	87	87	50	33	145
70	90	90	49	32	152
69	92	92	48	31	159
68	95	95	47	29	161
67	97	97	46	28	167
66	99	99	45	27	173
65	102	102	44	26	178
64	93	105	43	25	183
63	85	107	42	24	188
62	78	110	41	23	192
61	72	113	40	22	195
60	66	115	39	21	198
59	61	118	38	20	200
58	56	120	37	19	202
57	53	125	36	19	214
56	49	127	35 & under	18	214
55	46	131

Notwithstanding the foregoing, the above table will not be used if a greater lump sum payment is derived by using the UP-1984 Mortality Table, with an interest rate that is not greater than the immediate or deferred rate used by the Pension Benefit Guaranty Corporation to determine the present value of a lump sum distribution upon plan termination.  The rate(s) used shall be the rate(s) in effect on the January 1 of the year in which the Annuity Starting Date occurs.  No distribution may be made under this Section 14.3.3(d) after the Annuity Starting Date unless the ERI Salaried Participant and the ERI Salaried Participant’s spouse (or where the ERI Salaried Participant has died, the surviving spouse) consents in a notarized writing to such distribution.

(e)The payment of benefits under this Section 14.3.3 shall be subject to the requirements of Section 3.16 of the Plan.

Section 14.3.4Vested Right to Deferred Pension.

Effective February 27, 1987, the accrued benefit as of such date of each employee covered by the ERI Salaried Plan became 100% vested.  Any other ERI Salaried Participant shall acquire a right to a deferred pension if such ERI Salaried Participant’s employment is terminated, and the ERI Salaried Participant is not retired under any of the provisions of Section 14.3.2 hereof, provided such ERI Salaried Participant has attained age 65 or has 10 years or more of Continuous Service immediately prior to such termination, or has 9 years of Continuous Service and is employed by the Company for at least 1,000 hours in the tenth year of such service immediately prior to such termination (provided that, in the case of an ERI Salaried Participant with one or more Hours of Service after December 31, 1988, the numbers 5 and 4 shall be substituted for the numbers 10 and 9 in the foregoing sentence).

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For purposes of this provision, a year shall mean any 12-month period, commencing on an ERI Salaried Participant’s date of hire and during which the ERI Salaried Participant continues to be employed by the employer and shall include for vesting and eligibility purposes only all periods of absence for up to one year, provided the ERI Salaried Participant resumes participation under the Plan; fractional portions of a year, whether or not consecutive, shall be aggregated; an hour of employment shall mean an hour for which a person was directly or indirectly paid, or entitled to payment, by the employer for the performance of duties; and employment with any employer during or prior to the time such employer is controlled by the Company shall be deemed to be employment with the Company.

An ERI Salaried Participant so entitled to a deferred pension will receive pension payments for each month beginning with the month following that in which the ERI Salaried Participant attains age 65 and ending with the month in which the pensioner dies.  If a joint and survivor option is in effect, however, in accordance with Section 14.3.6 the payments provided for by such option will be continued during the life of a surviving spouse.

Subject to Section 14.3.3(c), each monthly pension payment will be an amount to be determined by applying the formula set forth in Section 14.3.3(a)(i) hereof, using as a basis the number of years of the ERI Salaried Participant’s Continuous Service at the earlier of the time of termination of employment and February 27, 1987.

An ERI Salaried Participant so entitled to a deferred pension may elect to have pension payments begin any month after the employee has attained age 55, in which case the amount of monthly pension, determined as provided in the preceding paragraph of this Section 14.3.4, shall be reduced by 5/9 of 1% for each of the first 60 months by which such pension commencement date precedes the calendar month following the ERI Salaried Participant’s 65th birthday, plus 5/18 of 1% for each additional month by which the pension commencement date precedes the calendar month following the ERI Salaried Participant’s 65th birthday.

Section 14.3.5Social Security Option.

Subject to the spousal consent provisions of Section 14.3.6, an ERI Salaried Participant retiring under the provisions of Section 14.3.2(b) or (c) hereof before the ERI Salaried Participant first becomes eligible to receive Social Security payments may elect to receive a retirement income providing larger monthly payments, in lieu of the retirement income otherwise payable upon early retirement, until the date the ERI Salaried Participant first becomes eligible to receive Social Security payments; thereafter, the monthly payments shall be reduced by the approximate amount of the ERI Salaried Participant’s monthly Social Security benefit.  Insofar as practical, therefore, a level total retirement income will be available for the participant.  This option is not available, however, if an option is elected by the ERI Salaried Participant under the provisions of Section 14.3.6.  Such larger payments shall equal such retirement income otherwise payable plus the following percentage of such approximate amount of the ERI Salaried Participant’s monthly Social Security benefit:

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Number of years until the ERI Salaried Participant first becomes eligible to receive Social Security payments	Level Income Percentage
0	100	%
1	89	%
2	80	%
3	71	%
4	64	%
5	57	%

Number of years until the ERI Salaried Participant first becomes eligible to receive Social Security payments	Level Income Percentage
6	52	%
7	47	%
8	42	%
9	38	%
10	34	%
11	31	%
12	28	%
13	26	%
14	24	%
15 or more	21	%
(interpolate for fractional years)

If, however, such larger monthly payments, as determined above, are smaller than such approximate amount of the employee’s Social Security benefit, such larger monthly payments shall instead equal the monthly pension otherwise payable divided by the complement of the applicable level income percentage.

Section 14.3.6Joint and Survivor Options.

(a)Pre-retirement Survivor Annuity.  The provisions of this Section shall apply to any ERI Salaried Participant who is credited with at least one Hour of Service on or after August 23, 1984, and such other ERI Salaried Participants as have elected coverage in accordance with Article VIII(1)(e) of the ERI Salaried Plan.  If an ERI Salaried Participant dies after the date on which the ERI Salaried Participant is vested in accordance with the first paragraph of Section 14.3.4 and before retiring, or a retired ERI Salaried Participant who has not elected otherwise dies prior to the commencement of benefits, the spouse of such ERI Salaried Participant shall be entitled to pension payments in the form of a Pre-retirement Survivor Annuity in accordance with the following provisions:

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(i)If the ERI Salaried Participant dies after becoming eligible for early retirement under Section 14.3.2(b) or (c), the spouse will receive pension payments for each month beginning with the month following the month in which the ERI Salaried Participant’s death occurs.  If the ERI Salaried Participant dies before becoming eligible for early retirement, the spouse will receive pension payments beginning with the first of the month coinciding with or next following the ERI Salaried Participant’s earliest retirement age, unless the spouse elects a later date.

(ii)The monthly pension payment to the spouse shall be an amount to be determined (A) by applying the formula set forth in Section 14.3.3(a) hereof (or a predecessor section of the ERI Salaried Plan), as in effect at the time of the ERI Salaried Participant’s death or earlier termination, using as a basis the number of years of the ERI Salaried Participant’s Pre-February 27, 1987 Service, (B) reduced by 5/9 of 1% for each of the first 60 months by which the commencement date of pension payments to the spouse precedes the calendar month following the ERI Salaried Participant’s 65th birthday, plus 5/18 of 1% for each additional month by which the commencement date precedes the calendar month following the ERI Salaried Participant’s 65th birthday, (C) reduced to reflect the amount the spouse would receive as though an Option II (as defined below) form of pension payments had been elected to take effect at the date of commencement of pension payments to the spouse, and (D) reduced further by any coverage factors applicable under Section 14.3.6(v).

(iii)Terminated ERI Salaried Participants entitled to a deferred pension may waive a Pre-retirement Survivor Annuity in writing at any time after the date of separation.  The waiver must be consented to by the employee’s spouse, and the spouse’s consent must acknowledge the effect of such rejection and must be witnessed by a notary public.  A revocation of a prior waiver may be made by the ERI Salaried Participant without the consent of the spouse at any time before the commencement of benefits.  The number of revocations shall not be limited.

(iv)The Administrator shall provide each terminated ERI Salaried Participant entitled to a deferred pension with a written explanation of the Pre-retirement Survivor Annuity in such terms and in such manner as would be comparable to the explanation provided for meeting the requirements applicable to Joint and Survivor Annuity specified in Section 14.3.6(b).

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(v)The monthly pension payable to a terminated ERI Salaried Participant will be reduced for the Pre-retirement Survivor Annuity coverage by the appropriate factor from the table below multiplied by the number of full years the coverage has been in effect after December 31, 1984.

	Reduction for Each Full Year of Coverage After Termination of Employment
Prior to Age 65	.3%
After Age 65	None

(b)Joint and Survivor Option.  Subject to the conditions hereinafter set forth in Section 14.3.6(b)(ii), if an ERI Salaried Participant shall be married at the beginning of the calendar month in which pension payments are to commence under the Plan, and unless the ERI Salaried Participant otherwise elects, the amount of each such pension payment which would otherwise be payable shall be reduced; and if the spouse shall survive the ERI Salaried Participant, a pension shall be payable under the Plan to the spouse during such spouse’s remaining lifetime after the ERI Salaried Participant’s death in an amount equal to 50% of the ERI Salaried Participant’s reduced pension payment in accordance with Option II.

(i)Every ERI Salaried Participant who is married when benefits are to commence will receive a written explanation of:

(A)The terms and conditions of the Joint and Survivor Option form of benefit;

(B)The ERI Salaried Participant’s right to make, and the effect of, an election to waive the Joint and Survivor Option form of benefit;

(C)The rights of an ERI Salaried Participant’s spouse; and

(D)The right to make, and the effect of, a revocation of a previous election to waive the Joint and Survivor Option.

An ERI Salaried Participant may elect in writing, at any time during the 90-day period ending on the Annuity Starting Date, to reject the Joint and Survivor Option form of benefit and receive the normal form or an optional form of benefit.  Such rejection must be accompanied by written spousal consent which acknowledges the effect of the election and is witnessed by a notary public.  Any rejection of the Joint and Survivor Option form of benefit may be cancelled by written election at any time prior to the date that benefits commence.

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(ii)If an ERI Salaried Participant wishes to have pension payments made to his spouse following his death in excess of that provided in the first paragraph of Section 14.3.6(b) above, the ERI Salaried Participant may so elect prior to retirement.  An ERI Salaried Participant who makes such an election will receive a reduced pension during the ERI Salaried Participant’s lifetime after retirement, and following the ERI Salaried Participant’s death the same level of pension (Option I), or one-half of it (Option II), or three-fourths of it (Option III), as the ERI Salaried Participant specified when the election was made, will be continued to the ERI Salaried Participant’s spouse during such spouse’s remaining life.

The pension of an ERI Salaried Participant electing Option I, II or III shall be reduced 19%, 11% or 15%, respectively, plus an additional reduction of 0.500%, 0.250% or 0.375%, respectively, for each full year in excess of three by which the ERI Salaried Participant’s birthdate precedes the spouse’s birthdate, to a maximum reduction (after 20 such excess years) of 29%, 16% or 22.5%, respectively; or minus 0.500%, 0.250% or 0.375%, respectively, for each full year in excess of three by which the spouse’s birthdate precedes the ERI Salaried Participant’s birthdate, to a minimum net reduction (after 10 such excess years) of 14%, 8.5% or 11.25%, respectively.

(iii)If an ERI Salaried Participant chooses to elect an option, written notice must be given to the Administrator, and the employee must furnish proof of the spouse’s age.

(iv)If an ERI Salaried Participant or the ERI Salaried Participant’s spouse dies before the option has become effective, the option is automatically cancelled.

(v)If the ERI Salaried Participant’s spouse dies after the option has become effective and after the ERI Salaried Participant has retired, the pension payments to the ERI Salaried Participant will remain unchanged.

(vi)An option may be cancelled or modified by the ERI Salaried Participant before the ERI Salaried Participant retires, by written notice filed with the Administrator.

(vii)An ERI Salaried Participant who acquires a vested interest in a pension under the provisions of Section 14.3.4 may elect a joint and survivor option in the same manner and under the same terms and conditions as an ERI Salaried Participant who is pensioned immediately upon termination of employment.  For this purpose, the vestee’s retirement date will be deemed to be the first date the vestee is entitled to receive deferred pension payments under Section 14.3.4.

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Section 14.3.7Computation of Average Monthly Pay.

In computing an employee’s average monthly pay for the purposes of Section 14.3.3 hereof, the total compensation the employee received during the applicable period (ending on or before February 27, 1987) shall be divided by 60.  However, if during the applicable period, a calendar month or more of absence shall have occurred which does not break the continuity of service and in respect to which absence the employee received no compensation from the Company, the number 60 shall be reduced by the number of full calendar months of such absence.

Section 14.3.8Employment of Pensioners.

An ERI Salaried Participant receiving early retirement benefits under the Plan, who is reemployed by the Company (as defined in Section 1.14 and including for this purpose all entities required to be treated as under common control with such Company under sections 414(b), (c), (m) and (o) of the Code) prior to attaining age 65 or 40 or more hours in any calendar month after commencement of such benefits and who has received the notice required by 29 Code of Federal Regulations Section 2530.203-3(b)(4), will have the pension permanently suspended during such reemployment.  Upon termination of such reemployment, or if sooner, attainment of age 65, the ERI Salaried Participant’s monthly pension will be recomputed so as to give effect to the additional service and the compensation received during such reemployment to the extent such service and compensation are required to be taken into account for benefit accrual purposes under Plan provisions other than this Article XIV.  The pension of such reemployed pensioner will be reduced by 0.9% of the sum of the early retirement benefits previously received.  If such recomputed pension exceeds that paid immediately prior to such reemployment, the employee shall be entitled to receive the monthly pension as so recomputed.  Notwithstanding the two preceding sentences, in no event will the monthly pension payable upon recommencement be less than that previously paid.”

Section 14.4ERI Hourly Participants.

Section 14.4.1Credited Service and Eligibility Service.

(a)Credited Service.  The Credited Service of an ERI Hourly Participant shall for purposes of this Article XIV be equal to his Credited Service under the ERI Hourly Plan as of February 27, 1987.

(b)Eligibility Service.  The Eligibility Service of an ERI Hourly Participant shall for purposes of this Article XIV be the sum of his Pre-February 28, 1987 Eligibility Service and his Post-February 27, 1987 Eligibility Service.  If at the date of an Employee’s retirement or termination of employment with the Company, his Eligibility Service is less than his Credited Service with the Company, his Eligibility Service shall be deemed to equal his Credited Service.

(i)Pre-February 28, 1987 Eligibility Service.  The Pre-February 28, 1987 Eligibility Service of an ERI Hourly Participant shall be equal to his Eligibility Service accrued under Article VI(3) of the ERI Hourly Plan as of February 27, 1987.

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(ii)Post-February 27, 1987 Eligibility Service.  The Post-February 27, 1987 Eligibility Service of an ERI Hourly Participant shall be computed for each ERI Hourly Participant on the basis of total hours compensated by the Company during each calendar year, with one year of Eligibility Service being recognized for each calendar year in which the ERI Hourly Participant receives compensation for 1,000 hours or more (including as compensated hours the hours referred to in subsections 2(b) through 2(f) of Article VI of the ERI Hourly Plan as in effect on December 31, 1988, in accordance with subsection 2(g) of such Article VI).  No proportionate or partial credits shall be given for the purpose of computing Eligibility Service.  Hours of pay at premium rates shall be computed as straight-time hours.

Section 14.4.2Requirements for Retirement Pensions and Deferred Vested Pensions.

(a)For purposes of this Section 14.4, the term “Pension” shall mean a series of uniform monthly payments payable to an ERI Hourly Participant, the first such payment to be made as of the beginning of the month following the last day of employment immediately prior to retirement, or such other date specified for that purpose, and the last payment to be made as of the beginning of the month in which the death of the ERI Hourly Participant occurs, or in which the Disability (as defined in Section 14.4.7) ends or, in the case of an Early Retirement Pension payable pursuant to Section 14.4.3(b) in which reemployment occurs prior to Normal Retirement Date.

(b)An ERI Hourly Participant shall be considered as retired under the Plan and as becoming a retired or disabled ERI Hourly Participant entitled to a Pension, upon termination of employment, provided such retirement occurs while the ERI Hourly Participant is employed by the Company and:

(i)after the first date he has attained age 65 (for purposes of this Section 14.4, his Normal Retirement Date), or

(ii)after age 60 but prior to age 65 and after 10 years of Eligibility Service, provided that if he retires at his option he shall be eligible for an Early Retirement Pension as provided in Section 14.4.3(b)(i) (provided that, if an ERI Hourly Participant is discharged for cause, he shall be deemed to have retired at his option), or

(iii)after age 60 but prior to age 65 and after 10 years of Eligibility Service, provided that if he retires at the option of B&W and under mutually satisfactory conditions he shall be eligible for an Early Retirement Pension as provided in Section 14.4.3(b)(ii), or

(iv)after 10 years of Eligibility Service in the event termination is caused by Disability and the ERI Hourly Participant is so disabled prior to reaching age 65.

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(c)Notwithstanding any other provisions of the Plan, an ERI Hourly Participant whose employment terminates, and (i) who (A) became vested in his accrued benefit effective February 27, 1987 pursuant to Article XIII of the ERI Hourly Plan or (B) at the time of such termination shall have 10 or more years of Eligibility Service (5 or more years of Eligibility Service in the case of an ERI Hourly Participant with one or more Hours of Service after December 31, 1988), and (ii) who shall not be eligible for or receiving any other pension under the Plan based (in whole or in part) on Credited Service prior to the date of such termination, shall be entitled to a Deferred Vested Pension as provided in Section 14.4.3(d) of the Plan.

(d)Notwithstanding any other provisions of the Plan, an ERI Hourly Participant or surviving spouse entitled to receive a Pension may, for personal reasons and without disclosure thereof, request the Administrator in writing to suspend for any period payment of all or any part of such Pension otherwise payable to him hereunder.  The Administrator, on receipt of such request, shall authorize such suspension, in which event the ERI Hourly Participant shall be deemed to have forfeited all rights to the amount of pension so suspended, but shall retain the right to have the full Pension otherwise payable to him hereunder reinstated as to future monthly payments upon written notice to the Administrator of his desire to revoke his prior request for a suspension under this paragraph.  Any suspension requested hereunder by an ERI Hourly Participant or benefits payable to him under the Plan shall not affect benefits payable under any survivorship election he has made or is deemed to have made under the Plan.

(e)Payment of benefits will, unless the ERI Hourly Participant elects a later date, begin not later than the later of (i) sixty days after the close of the Plan Year in which the ERI Hourly Participant attains the earlier of age 65 or the Normal Retirement Date or (ii) sixty days after the end of the Plan Year in which the ERI Hourly Participant’s employment terminates.  The payment of benefits shall be further subject to Section 3.16.

(f)Notwithstanding any other provisions of the Plan an ERI Hourly Participant, upon attaining the age of 65, shall, prior to retirement or termination of employment, begin receiving a Pension on the first of the month following attainment of such age.

Section 14.4.3Retirement and Other Benefits.

(a)Normal Retirement Pension.  The amount of the monthly Pension payable out of the Trust to an ERI Hourly Participant upon or after reaching age 65 under the conditions of Section 14.4.2(b) of the Plan, and who shall make application therefor, or to an ERI Hourly Participant entitled to a Pension in accordance with Section 14.4.2(f), shall be a life income benefit equal to $10.00 multiplied by the number of his years of Credited Service (the “Normal Retirement Pension”).

Subject to Section 14.4.2(f), the monthly Normal Retirement Pension payable from the Trust shall become payable to the ERI Hourly Participant, if he then shall be living, on the first day of the first month after (i) his employment shall have terminated, and (ii) he shall have filed an application for such Pension; and shall be payable on the first day of each month thereafter during his lifetime.

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Upon attainment of his Normal Retirement Date, the rights of an ERI Hourly Participant to his benefits under this Section shall be nonforfeitable.

(b)Early Retirement Pension.

(i)The amount of the monthly Pension payable out of the Trust to an Employee who shall retire at his option under the conditions of Section 14.4.2(b)(ii) of the Plan, and who shall make application therefor, shall be one of the following as the ERI Hourly Participant shall elect:

(A)A deferred life income benefit, at age 65 determined in accordance with Section 14.4.3(a), based upon his Credited Service, or

(B)An immediate life income benefit commencing at Early Retirement in an amount equal to the deferred benefit provided for in (A) above, reduced by a percentage equal to 5/9 of 1% multiplied by the number of months from the date the ERI Hourly Participant’s Pension originally commenced to attainment of age 65.

(ii)The amount of the monthly Pension payable out of the Trust to an ERI Hourly Participant who shall retire under the conditions of Section 14.4.2(b)(iii) of the Plan shall be:

(A)A life income benefit in an amount equal to $10.00 for each year of his Credited Service, and

(B)A Temporary Benefit in an amount equal to $10.00 for each year of his Credited Service (not to exceed a total of $250.00); provided, however, that for any month after the retired ERI Hourly Participant attains age 65 or becomes Eligible For an Unreduced Social Security Benefit, whichever occurs first, the Temporary Benefit shall not be payable.

For the purpose of subsection (i) above, a retired ERI Hourly Participant shall be considered as being Eligible For an Unreduced Social Security Benefit even though he does not qualify for, or loses, such payments through failure to make application therefor, entering into covered employment, or other act or failure to act.  An ERI Hourly Participant discharged for cause after such ERI Hourly Participant has attained age 60 but before age 65, and who has met the requirements set forth in Section 14.4.2(c)(i) shall be entitled only to the benefits provided under Section 14.4.3(b)(i) of the Plan.

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(iii)The monthly Early Retirement Pension shall become payable to the retired ERI Hourly Participant, if he then shall be living, on the first day of the first month after (A) he shall have become eligible for such Pension and (B) he shall have filed application for such Pension; and shall be payable on the first day of each month thereafter during his lifetime or until he shall be reemployed prior to his Normal Retirement Date by the Company (as defined in Section 14.4.3(e)).

(c)Disability Retirement Pension.  The monthly Pension payable out of the Trust to an ERI Hourly Participant who shall retire and be eligible for a Pension under the provisions of Section 14.4.2(b)(iv) of the Plan shall be:

(i)A life income benefit in an amount equal to $10.00 for each year of his Credited Service, and

(ii)A Temporary Benefit in an amount equal to $10.00 for each year of his Credited Service (not to exceed a total of $250.00); provided, however, that for any month after the retired ERI Hourly Participant attains age 65 or becomes Eligible For an Unreduced Social Security Benefit, whichever occurs first, the Temporary Benefit shall not be payable.

For the purposes of this Section, a retired ERI Hourly Participant shall be considered as being Eligible For an Unreduced Social Security Benefit by reason of disability even though he does not qualify for, or loses, such payments through failure to make application therefor or other act or failure to act.

The monthly Disability Retirement Pension payable from the Trust shall become payable to the retired ERI Hourly Participant, if he then shall be living, on the first day of the first month after (A) he shall have filed an application for such Pension, and (B) his Disability Retirement shall have commenced, and (C) at least 26 weeks have elapsed since the date upon which his Disability commenced, and shall be payable on the first day of each month thereafter until, but not including, the month after (1) his Disability Retirement shall end, or (2) he shall attain age 65, or (3) he shall die, whichever first shall occur.

When a retired ERI Hourly Participant receiving a Disability Retirement Pension shall reach age 65 or the qualifying age for an unreduced insurance benefit by reason of age under the Federal Social Security Act, he thereafter, if eligible, shall receive a Normal Retirement Pension in accordance with the provisions of Section 14.4.3(a) and shall no longer be considered to be on Disability Retirement.

(d)Deferred Vested Pension.  The monthly Pension payable out of the Trust to an ERI Hourly Participant who shall terminate employment and be eligible for a Deferred Vested Pension under the provisions of Section 14.4.2(c) of the Plan shall be a life income benefit equal to $10.00 multiplied by the number of his years of Credited Service.

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The monthly Pension shall become payable to such ERI Hourly Participant, if he shall then be living, on the first day of the month after (i) his 65th birthday and (ii) he shall have filed an application for such Pension; and shall be payable on the first day of each month thereafter during his lifetime, provided, however, that such ERI Hourly Participant may elect a monthly Pension commencing on the first day of any month after he shall have reached his 60th birthday and before he shall have reached his 65th birthday, in which event his monthly Pension shall (A) be in an amount equal to the Pension payable at age 65 reduced by a percentage equal to 5/9 of 1% multiplied by the number of months from the date his Pension is to commence to the first day of the month following his 65th birthday and (B) be payable on the first day of each month thereafter during his lifetime or until he shall be reemployed prior to his Normal Retirement Date by the Company (as defined in Section 14.4.3(e)).

(e)Reemployment.  If an ERI Hourly Participant receiving an Early Retirement Pension shall be reemployed prior to his Normal Retirement Date by the Company (which term, for purposes of this Section 14.4.3(e), shall mean the Company as defined in Section 1.14 and all entities required to be treated as under common control with such Company pursuant to section 414(b)(c)(m) or (o) of the Code) for 40 or more hours in any calendar month, and has been given the notice required by 29 Code of Federal Regulations Section 2530.203-3(b)(4), his Pension shall be cancelled.  Upon his subsequent retirement, or if sooner, attainment of age 65, his Pension shall be based on the total of his Credited Service; provided, however, that if an ERI Hourly Participant eligible for a Normal Retirement Pension or a Pension in accordance with Section 14.4.2(f) shall previously have been retired on an Early Retirement Pension under the conditions of Section 14.4.2(b)(ii) and then returned to employment, his monthly Normal Retirement Pension or Pension payable in accordance with Section 14.4.2(f), if applicable, payable from the Trust shall be reduced by 8/10 of 1% of the sum of the Early Retirement Benefit payments he shall have received but not to exceed 25% of the monthly Pension payable prior to such reduction.

If the Disability Retirement Pension of a retired ERI Hourly Participant shall cease without loss of seniority, and provided he shall not have subsequently incurred a break in his seniority, he shall be credited upon subsequent Retirement, or if sooner, attainment of age 65, with the Credited Service and Eligibility Service he had at the time his Disability Retirement commenced and shall also receive credit for Eligibility Service accumulated during the period of reemployment.

An ERI Hourly Participant who previously terminated employment and was eligible for a Deferred Vested Pension, and who again becomes an ERI Hourly Participant, prior to his application for such Pension, shall receive credit for Credited Service and Eligibility Service accumulated at the time of such termination and shall also receive credit for Eligibility Service accumulated during the period of reemployment.  Upon subsequent retirement, or if sooner, attainment of age 65, such ERI Hourly Participant’s eligibility for retirement and the amount of monthly Pension shall be determined on the basis of his total Credited Service.

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(f)Survivorship Option.

(i)In lieu of the applicable Life Income Benefit provided in subsections (a) through (d) of this Section 14.4.3 (but not any Temporary Benefit ceasing at or before age 65), an ERI Hourly Participant who retires or has attained his Normal Retirement Date, or an ERI Hourly Participant whose employment was terminated and is entitled to a Deferred Vested Pension, shall automatically be deemed to have elected a reduced monthly benefit during his lifetime with the provision that, following his death, a monthly survivor’s benefit shall be payable to his designated spouse during the further lifetime of the spouse.

(ii)The automatic election shall be deemed to be made on the following date, whichever is applicable:  (A) for a person retiring on Normal Retirement Pension, Early Retirement Pension, or Disability Retirement Pension, the date on which his employment with the Company terminates; or (B) for an ERI Hourly Participant who has attained his Normal Retirement Date, his Normal Retirement Date or January 1, 1984, whichever is later; or (C) for an ERI Hourly Participant who is entitled to a Deferred Vested Pension, the first day of the first month after he reaches age 65 or if earlier, the first day of the first month he receives a Deferred Vested Pension.  The automatic election provided in this subsection shall be applicable only with respect to a spouse to whom the ERI Hourly Participant is married at the date of election and has been married for at least one year prior to that date; provided, however, that an ERI Hourly Participant married at the date of election, but for less than one year, shall be deemed to have elected the survivorship option to become effective on the first day of the month following the month in which the ERI Hourly Participant has been married one year, or if later, the first day of the month for which his first benefit under the Plan is payable.

An ERI Hourly Participant may prevent the automatic election provided in this subsection by specific written rejection accompanied by written spousal consent which has been witnessed by a notary public and executed in whatever form and manner may be prescribed for this purpose and before the time such election would be deemed to be made, in which event he shall be entitled to the applicable life income benefit provided in Section 14.4.3(a), (b), (c) or (d) without the reduction provided in subsection 14.4.3(f) (iii) below; provided, however, that said rejection may be cancelled by the ERI Hourly Participant by written action at any time prior to the date his benefits are to commence.  The notice and waiver provisions of Section 3.7(d) and (e) shall apply to such rejections.

(iii)The amount of the reduced monthly benefit payable to a retired ERI Hourly Participant (including for purposes of this Section an ERI Hourly Participant entitled to a Deferred Vested Pension and an ERI Hourly Participant entitled to a Pension pursuant to Section 14.4.2(f)) under this Section 14.4.3(f), shall be determined by reducing the amount of the applicable life income benefit by a percentage, determined as hereinafter provided, of the life income benefit that would have been payable to the retired ERI Hourly Participant if he had rejected a survivorship option.  The percentage to be used shall be ten percent (10%) if the ERI Hourly Participant’s age and his spouse’s age are the same (the age of each determined as being the age at his or her birthday nearest the date on which the first payment of such ERI Hourly Participant’s benefit shall be payable).  Such percentage shall be decreased by 1/2 of 1% for each year up to twenty (20) years that the spouse’s age exceeds the ERI Hourly Participant’s age and shall be increased by 1/2 of 1% for each year that the spouse’s age is less than the ERI Hourly Participant’s age.

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The reductions provided in this subsection shall be made in all monthly benefits payable to the retired ERI Hourly Participant.

(iv)The amount of the monthly survivor’s benefit payable to the surviving spouse of a retired ERI Hourly Participant for whom the survivorship option hereunder is effective shall be fifty percent (50%) of the amount of the monthly life income benefit that was or would have been payable to the retired Employee after the reduction provided in (iii) above.

(g)Special Pre-Retirement Survivor Option.

(i)The following Special Pre-Retirement Option shall be deemed to have been elected automatically by an Employee who (A) has seniority on or after January 1, 1984 and has met the vesting requirements of Section 14.4.2(c) or (B) terminates employment and is eligible for a Deferred Vested Pension under Section 14.4.3(d).  The Special Pre-Retirement Survivor Option shall also be provided in respect of ERI Hourly Participants who elected such coverage pursuant to Article V, Section 7(a) of the ERI Hourly Plan.

An ERI Hourly Participant may prevent this automatic election by a specific written rejection accompanied by written spousal consent which has been witnessed by a notary public.  Any rejection may be revoked at any time, or a subsequent rejection made at any time prior to commencement of benefits.  Anything to the contrary notwithstanding, no rejection may be made until the Employee has attained age 35.

(ii)Under this Special Pre-Retirement Survivor Option, a reduced monthly Pension will be payable to the ERI Hourly Participant upon his subsequent retirement under the Plan, commencement of a Deferred Vested Benefit or commencement of a Pension pursuant to Section 14.4.2(f) (and the survivor’s benefit available pursuant to Section 14.4.3(f) shall be determined by reference to such reduced monthly Pension), in return for which a survivor’s benefit shall be payable to the ERI Hourly Participant’s spouse but only in the event of his death prior to his retirement, commencement of Deferred Vested Benefits, or commencement of a Pension pursuant to Section 14.4.2(f) (whichever is applicable) while the option is in effect.  The survivor’s benefit shall not commence prior to the date the ERI Hourly Participant would have attained age 60.  The amount of the spouse’s survivor’s benefit shall be equal to 50% of the life income benefit, if any, to which the ERI Hourly Participant would have been entitled if he had retired under Section 14.4.3(a), (b)(i)(B) or (d) on the day preceding his death but not prior to age 60 with the survivorship option set forth in Section 14.4.3(f) in effect.

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(iii)The reduction in the monthly Pension payable to an ERI Hourly Participant will be determined by multiplying the appropriate factor from the table below by the number of months the coverage has been in effect:

Age of Employee	Reduction for Each Complete Month of Coverage While in Active Service or with Seniority Status	Reduction for Each Complete Month of Coverage While Not in Active Service Nor with Seniority Status
Under 65	.0002083 (.02083%)	.00025 (.025%)
Over 65	None	None

(h)Special Lump Sum Payment.  An ERI Hourly Participant or a surviving spouse who is entitled to a monthly benefit under this Section 14.4.3 shall be paid the actuarial equivalent of said benefit as a single lump sum in lieu of such monthly benefit, provided the lump sum is less than $5,000.  In the case of an ERI Hourly Participant, the benefit described herein shall be the monthly pension payable at the later of age 65 or pension commencement age.  For purposes of this section, the actuarial equivalent shall be calculated using the Applicable Interest Rate under Section 417(e) of the Code for the second full calendar month before the date of distribution, and the Applicable Mortality Table under Section 417(e) of the Code.  Notwithstanding the preceding sentence, the present value of the accrued lump sum retirement benefit due an Employee who is entitled to a monthly benefit under this Section 14.4.3 shall not be less than the present value of such Participant’s vested accrued benefit as of December 31, 1999 utilizing an interest rate that is not greater than the immediate or deferred rate, in effect on January 1 of the year in which the Annuity Starting Date occurs, used by the Pension Benefit Guaranty Corporation to determine the present value of a lump sum distribution upon plan termination) and the UP-1984 Mortality Table.  The surviving spouse of an ERI Hourly Participant who, pursuant to Sections 14.4.3(f) and (g), is automatically deemed to have elected survivor benefits, shall consent in a notarized writing to any such lump sum payment.

(i)Other Benefits.  No benefits are payable under the Plan upon the death of an ERI Hourly Participant, except pursuant to valid election of an option pursuant to Section 14.4.3(g), or as otherwise provided under Section 14.4.3(f).  No benefits are payable under the Plan upon termination of employment of an ERI Hourly Participant who does not satisfy any of the eligibility requirements set forth in Section 14.4.2.

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SECTION 14.4.3 OF THE PLAN WAS AMENDED BY AMENDMENT NO. 1, EFFECTIVE AS OF JANUARY 1, 1998, BY SUBSTITUTING THE NUMBER “$5,000” FOR THE NUMBER “$3,500” WHEREVER THE LATTER APPEARS THEREIN.

Section 14.4.4Loss of Credited Service and Eligibility Service.

An ERI Hourly Participant will lose all Credited Service and Eligibility Service for purposes of this Plan (and if reemployed, shall be considered a new employee for the purposes of this Plan):

(a)If before becoming entitled to a Pension benefit under the Plan, he quits, is discharged or released, of if his seniority is broken for any other reason, and

(b)If he receives compensation from the Company for less than 500 hours (computed as set forth in Section 2 of Article IV of the ERI Plan as in effect on December 31, 1988) in the calendar year when such quit, discharge, release, or loss of seniority occurs or in the next following calendar year.  Any such occurrence is hereinafter referred to as a “Break in Service.”  If an ERI Hourly Participant referred to in subparagraph (a) above is reemployed prior to incurring a “Break in Service,” no loss of Credited Service or Eligibility Service will be deemed to have occurred.

Notwithstanding the foregoing, however:

(c)An ERI Hourly Participant retired under the Plan who again becomes entitled to accrue Eligibility Service will have his Credited Service and Eligibility Service at the time of original retirement reinstated; and

(d)If an ERI Hourly Participant has a Break in Service and is subsequently reemployed by the Company and earns not less than one year of Eligibility Service, the Eligibility Service and Credited Service he had when the Break in Service occurred shall be restored to him.

Section 14.4.5Social Security Benefit.

In determining benefits under the Plan, the Social Security Benefit shall be assumed to be the amount applicable to any month for which a benefit is payable under this Plan to an ERI Hourly Participant under the Old Age and Disability Insurance provisions of the Federal Social Security Act, as from time to time amended, for the benefit of the ERI Hourly Participant, excluding payments for wives and dependents.

An ERI Hourly Participant shall be deemed to be eligible for a Social Security Benefit even though the ERI Hourly Participant either does not apply for, or loses part or all of such payments through delay in applying for them, by entering into covered employment or otherwise.

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Section 14.4.6Integrated Benefits.

(a)Notwithstanding any other provisions of the Plan, in determining the portion of the benefit payable out of the Trust Fund to any ERI Hourly Participant, a deduction shall be made unless waived by the Company (which term for purposes of this Section 14.4.6 shall mean the Company as defined in Section 1.14 and any entity required to be treated as under common control with such Company pursuant to sections 414(b), (c), (m) or (o) of the Code), equivalent to all or any part of any of the following benefits payable to such ERI Hourly Participant by reason of any law of the United States, or any political subdivision thereof, which has been or shall be enacted, provided that such deductions shall be to the extent that such benefits have been provided by premiums, taxes, or other payments paid by or at the expense of the Company:

(i)Workers’ Compensation (except fixed statutory payments for the loss of any bodily member).

(ii)Disability benefits (other than those payable on the basis of “need,” because of military service, or under the Federal Social Security Act).

(b)Notwithstanding any other provisions of the Plan, in determining the retirement benefit payable out of the Trust Fund to any ERI Hourly Participant, no benefit shall be payable for any month for which the retired ERI Hourly Participant is receiving weekly accident or sickness benefits under any plan to which the Company shall have contributed; for any month for which the retired ERI Hourly Participant is receiving such accident or sickness benefits for part of the month, a proportionate amount of the monthly retirement benefit otherwise payable shall be paid for that part of the month for which the retired ERI Hourly Participant receives no such accident or sickness benefits.

(c)Any lump sum payment of integrated Benefits payable to an ERI Hourly Participant shall be pro-rated on a monthly basis from the date of payment thereof and no Pension shall be payable until said sum as thus pro-rated is exhausted.

Section 14.4.7Disability.

(a)An ERI Hourly Participant shall be deemed to be totally and permanently disabled when, on the basis of satisfactory medical evidence, he is found to be totally and presumably permanently prevented from engaging in gainful occupation or employment for wage or profit as a result of a physical or mental condition either occupational or nonoccupational in cause.

(b)Any disabled retired ERI Hourly Participant may be required to submit to medical examination, at any time during retirement prior to age 65, but not more often than semi-annually, to determine whether he is eligible for continuance of the Disability Retirement Pension.  If on the basis of such examination, it is found that he is no longer disabled, or if he engages in gainful employment, except for purposes of rehabilitation as determined by the Board, his Disability Retirement Pension will cease.  In the event the disabled retired ERI Hourly Participant refuses to submit to medical examination, his Pension will be discontinued until he submits to examination.

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ARTICLE XV

SPECIAL VESTING RULES IN CONNECTION
WITH CORPORATE OFFICE SHUTDOWN
AND COMPANY STREAMLINING

Notwithstanding any other provision of this Plan, (a) each Participant who was actively employed at the Henley Properties corporate office in La Jolla, California as of March 30, 1990 and whose employment is terminated by Henley Properties in connection with the shutdown of that office, and (b) each Participant whose employment with Signal Landmark is terminated in connection with the streamlining of that company’s operations, shall be fully vested in his Accrued Benefit.

IN WITNESS WHEREOF, the Plan is executed this 21st day of December, 2009.

CALIFORNIA COASTAL COMMUNITIES, INC.
By:	/s/ S.G. Sciutto

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APPENDIX I

LIMITATIONS ON BENEFITS

This Appendix applies to a Participant’s Accrued Benefit derived from Employer contributions in Limitation Years (as defined below) beginning on or after January 1, 2008, except as otherwise provided.  The application of the provisions of this Appendix will not cause the Maximum Permissible Benefit (as defined below) for any Participant to be less than the Participant’s accrued benefit under all the defined benefit plans of the Employer or a Previous Employer as of the end of the last Limitation Year beginning before January 1, 2008, under provisions of the plans that were both adopted and in effect before April 5, 2007. Effective December 31, 1993, benefit accruals under this Plan were frozen.  Consequently, this Appendix is to apply prospectively, only, to benefits (if any) accrued under the Plan after the date (if ever) that benefit accruals under the Plan cease to be frozen.  No benefits under this frozen Plan will be increased as a result of the EGTRRA increase in the limitations of Code Section 415(b).  Similarly, the annual Remuneration of each participant shall not be increased due to EGTRRA, and no cost of living increases shall be in effect that would result in such an increase.

1.01General Rule.  The Annual Benefit otherwise payable to a Participant under the Plan at any time will not exceed the Maximum Permissible Benefit.  If the benefit the Participant would otherwise accrue in a Limitation Year would produce an Annual Benefit in excess of the Maximum Permissible Benefit, the benefit will be limited (or the rate of accrual reduced) to a benefit that does not exceed the Maximum Permissible Benefit.  If the Participant is, or has ever been, a participant in another qualified defined benefit plan (without regard to whether the plan has been terminated) maintained by the Employer or a Previous Employer, the sum of the Participant’s Annual Benefits from all such plans may not exceed the Maximum Permissible Benefit.

1.02Annual Benefit means a benefit payable annually in the form of a straight life annuity.  Except as provided below, where a benefit is payable in a form other than a straight life annuity, the benefit will be adjusted to an actuarially equivalent straight life annuity that begins at the same time as such other form of benefit and is payable on the first day of each month, before applying the limitations of this Appendix.  For a Participant who has or will have distributions commencing at more than one Annuity Starting Date, the Annual Benefit will be determined as of each such Annuity Starting Date (and will satisfy the limitations of this Appendix as of each such date), actuarially adjusting for past and future distributions of benefits commencing at the other Annuity Starting Dates.  For this purpose, the determination of whether a new Annuity Starting Date has occurred will be made without regard to Regulation 1.401(a)-20, Q&A 10(d), and with regard to Regulations 1.415(b)-1(b)(1)(iii)(B) and (C).

(a)Actuarial Adjustment.  No actuarial adjustment to the benefit will be made for (i) survivor benefits payable to a surviving Spouse under a qualified joint and survivor annuity to the extent such benefits would not be payable if the Participant’s benefit were paid in another form; (ii) benefits that are not directly related to retirement benefits (such as a qualified disability benefit, preretirement incidental death benefits, and post-retirement medical benefits); or (iii) the inclusion in the form of benefit of an automatic benefit increase feature; provided the form of benefit is not subject to Code Section 417(e)(3) and would otherwise satisfy the limitations of this Appendix, and the amount payable under the form of benefit in any Limitation Year will not exceed the limits of this Appendix applicable at the Annuity Starting Date, as increased in subsequent years pursuant to Code Section 415(d).  For this purpose, an automatic benefit increase feature is included in a form of benefit if the form of benefit provides for automatic, periodic increases to the benefits paid in that form.

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(b)Determination.  The determination of the Annual Benefit will take into account social security supplements described in Code Section 411(a)(9) and benefits transferred from another defined benefit plan, other than transfers of distributable benefits pursuant to Regulation 1.411(d)-4, Q&A-3(c), but will disregard benefits attributable to Employee Contributions or rollover contributions.

(c)Actuarial Equivalence.  The determination of actuarial equivalence of forms of benefit other than a straight life annuity will be made in accordance with paragraph (1) or paragraph (2), below:

(1)Benefit Forms Not Subject to Code Section 417(e)(3).  For Limitation Years beginning on or after January 1, 2008, the actuarially equivalent straight life annuity is equal to the greater of (1) the annual amount of the straight life annuity (if any) payable to the Participant under the Plan commencing at the same Annuity Starting Date as the Participant’s form of benefit; and (2) the annual amount of the straight life annuity commencing at the same Annuity Starting Date that has the same actuarial present value as the Participant’s form of benefit, computed using a 5 percent interest rate assumption and the Applicable Mortality Table for that Annuity Starting Date.

(2)Benefit Forms Subject to Code Section 417(e)(3).  If the Annuity Starting Date of the Participant’s form of benefit is in a Plan Year beginning after 2005, the actuarially equivalent straight life annuity is equal to the greatest of (I) the annual amount of the straight life annuity commencing at the same Annuity Starting Date that has the same actuarial present value as the Participant’s form of benefit, computed using an 8% interest rate and the 1983 Unisex Group Annuity Mortality Table set back one year; (II) the annual amount of the straight life annuity commencing at the same Annuity Starting Date that has the same actuarial present value as the Participant’s form of benefit, computed using a 5.5 percent interest rate assumption and the Applicable Mortality Table; and (III) the annual amount of the straight life annuity commencing at the same Annuity Starting Date that has the same actuarial present value as the Participant’s form of benefit, computed using the Applicable Interest Rate and the Applicable Mortality Table, divided by 1.05.

1.03Remuneration for a Limitation Year, for purposes of this Appendix, is the compensation (within the meaning of Code Section 415(c)(3)) actually paid or made available during such Limitation Year.  Remuneration for a Limitation Year will include amounts earned but not paid during the Limitation Year solely because of the timing of pay periods and pay dates, provided the amounts are paid during the first few weeks of the next Limitation Year.  For Limitation Years beginning on or after January 1, 2008, Remuneration for a Limitation Year also will include compensation paid by the later of 2 1/2 months after an employee’s termination of employment or the end of the Limitation Year that includes the date of the employee’s termination of employment, if:

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(a)Regular.  The payment is regular compensation and, absent termination of employment, the payments would have been paid to the employee while the employee continued in employment with the Employer; or,

(b)Leave.  The payment is for unused accrued bona fide sick, vacation or other leave that the employee would have been able to use if employment had continued; or

(c)Nonqualified Plan.  The payment is received by the employee pursuant to a nonqualified unfunded deferred compensation plan and would have been paid at the same time if employment had continued, but only to the extent includible in gross income.

(d)Exclusions.  Any payments not described above will not be considered Remuneration if paid after termination of employment, even if paid by the later of 2 1/2 months after the date of termination of employment or the end of the Limitation Year that includes the date of termination of employment, except, (a) if an individual who does not currently perform services for the Employer by reason of qualified military service (within the meaning of Code Section 414(u)(1)) to the extent these payments do not exceed the amounts the individual would have received if the individual had continued to perform services for the Employer rather than entering qualified military service; or (b) if compensation paid to a Participant who is permanently and totally disabled, as defined in Code Section 22(e)(3), provided salary continuation applies to all Participants who are permanently and totally disabled for a fixed or determinable period, or the Participant was not a Highly Compensated Employee immediately before becoming disabled.

(e)Back Pay.  Back pay, within the meaning of Regulation 1.415(c)-2(g)(8), will be treated as Remuneration for the Limitation Year to which the back pay relates to the extent the back pay represents compensation that would otherwise be included under this definition.

(f)Deferrals.  For Limitation Years beginning after December 31, 1997, Remuneration paid or made available during such Limitation Year includes amounts that would otherwise be included in Remuneration but for an election under Code Sections 125(a), 402(e)(3), 402(h)(1)(B), 402(k), or 457(b).

(g)Transportation Fringe.  For Limitation Years beginning after December 31, 2000, Remuneration also includes elective amounts that are not includible in the gross income of the employee by reason of Code Section 132(f)(4).

(h)Deemed Remuneration.  For Limitation Years beginning after December 31, 2001, Remuneration includes deemed Code Section 125 compensation.  Deemed Code Section 125 compensation is an amount that is excludable under Code Section 106 that is not available to a Participant in cash in lieu of group health coverage under a Code Section 125 arrangement solely because the Participant is unable to certify that he or she has other health coverage.  Amounts are deemed Code Section 125 compensation only if the Employer does not request or otherwise collect information regarding the Participant’s other health coverage as part of the enrollment process for the health plan.

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1.04Defined Benefit Remuneration Limitation means 100 percent of a Participant’s High Three-Year Average Remuneration, payable in the form of a straight life annuity.

(a)Automatic Adjustment.  In the case of a Participant who has had a termination of employment, the Defined Benefit Remuneration Limitation applicable to the Participant in any Limitation Year beginning after the date of termination of employment will not be automatically adjusted.

(b)Rehire.  In the case of a Participant who is rehired after a termination of employment, the Defined Benefit Remuneration Limitation is the greater of 100 percent of the Participant’s High Three-Year Average Remuneration, as determined prior to the termination of employment, or 100 percent of the Participant’s High Three-Year Average Remuneration, as determined after the termination of employment.

1.05Defined Benefit Dollar Limitation.  Effective for Limitation Years ending after December 31, 2001, the Defined Benefit Dollar Limitation is $160,000, automatically adjusted under Code Section 415(d), effective January 1 of each year and available in the form of a straight life annuity.  In the case of a Participant who has had a termination of employment, the Defined Benefit Dollar Limitation applicable to the Participant in any Limitation Year beginning after the date of termination of employment will not be automatically adjusted pursuant to Code Section 415(d).

1.06Employer means, for purposes of this Appendix, the Company and its Affiliated Companies determined with the adjustment required by Code Section 415(h).

1.07High Three-Year Average Remuneration means the average Remuneration for the three consecutive years of service (or, if the Participant has less than three consecutive years of service, the Participant’s longest consecutive period of service, including fractions of years, but not less than one year) with the Employer that produces the highest average.  A year of service with the Employer is the 12-consecutive month period defined below, in this Appendix.  In the case of a Participant who is rehired by the Employer after a termination of employment, the Participant’s High Three-Year Average Remuneration will be calculated by excluding all years for which the Participant performs no services for and receives no Remuneration from the Employer (the break period) and by treating the years immediately preceding and following the break period as consecutive.  To the extent required by applicable law, a Participant’s Remuneration for a year of service will not include Remuneration in excess of the limitation under Code Section 401(a)(17) that is in effect for the calendar year in which such year of service begins.

1.08Limitation Year means the calendar year.

1.09Maximum Permissible Benefit means the lesser of the Defined Benefit Dollar Limitation or the Defined Benefit Remuneration Limitation (both adjusted where required, as provided below).

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(a)Adjustment for Less Than 10 Years of Participation or Service.  If the Participant has less than 10 years of participation in the Plan, the Defined Benefit Dollar Limitation will be multiplied by a fraction — (i) the numerator of which is the number of years (or part thereof, but not less than one year) of participation in the Plan, and (ii) the denominator of which is 10.  In the case of a Participant who has less than ten Years of Service with the Employer, the Defined Benefit Remuneration Limitation will be multiplied by a fraction — (i) the numerator of which is the number of Years (or part thereof, but not less than one year) of Service with the Employer, and (ii) the denominator of which is 10.  The Defined Benefit Dollar Limitation will be adjusted if the Annuity Starting Date of the Participant’s benefit is before age 62 or after age 65.

(b)Adjustment of Defined Benefit Dollar Limitation for Benefit Commencement Before Age 62.

(1)Plan Does Not Have Immediately Commencing Straight Life Annuity Payable at Both Age 62 and the Age of Benefit Commencement.  If the Annuity Starting Date for the Participant’s benefit is prior to age 62 and occurs in a Limitation Year beginning on or after January 1, 2008, and the Plan does not have an immediately commencing straight life annuity payable at both age 62 and the age of benefit commencement, the Defined Benefit Dollar Limitation for the Participant’s Annuity Starting Date is the annual amount of a benefit payable in the form of a straight life annuity commencing at the Participant’s Annuity Starting Date that is the actuarial equivalent of the Defined Benefit Dollar Limitation (adjusted for years of participation less than 10, if required) with actuarial equivalence computed using a 5 percent interest rate assumption and the Applicable Mortality Table for the Annuity Starting Date (and expressing the Participant’s age based on completed calendar months as of the Annuity Starting Date).

(2)Plan Has Immediately Commencing Straight Life Annuity Payable at Both Age 62 and the Age of Benefit Commencement.  If the Annuity Starting Date for the Participant’s benefit is prior to age 62 and occurs in a Limitation Year beginning on or after January 1, 2008, and the Plan has an immediately commencing straight life annuity payable at both age 62 and the age of benefit commencement, the Defined Benefit Dollar Limitation for the Participant’s Annuity Starting Date is the lesser of the limitation determined under paragraph (1), immediately above, and the Defined Benefit Dollar Limitation (adjusted for years of participation less than 10, if required) multiplied by the ratio of the annual amount of the immediately commencing straight life annuity under the Plan at the Participant’s Annuity Starting Date to the annual amount of the immediately commencing straight life annuity under the Plan at age 62, both determined without applying the limitations of this Appendix.

(c)Adjustment of Defined Benefit Dollar Limitation for Benefit Commencement After Age 65.

(1)Plan Does Not Have Immediately Commencing Straight Life Annuity Payable at Both Age 65 and the Age of Benefit Commencement.  If the Annuity Starting Date for the Participant’s benefit is after age 65 and occurs in a Limitation Year beginning on or after January 1, 2008, and the Plan does not have an immediately commencing straight life annuity payable at both age 65 and the age of benefit commencement, the Defined Benefit Dollar Limitation at the Participant’s Annuity Starting Date is the annual amount of a benefit payable in the form of a straight life annuity commencing at the Participant’s Annuity Starting Date that is the actuarial equivalent of the Defined Benefit Dollar Limitation (adjusted for years of participation less than 10, if required), with actuarial equivalence computed using a 5 percent interest rate assumption and the Applicable Mortality Table for that Annuity Starting Date (and expressing the Participant’s age based on completed calendar months as of the Annuity Starting Date).

I-5

(2)Plan Has Immediately Commencing Straight Life Annuity Payable at Both Age 65 and the Age of Benefit Commencement.  If the Annuity Starting Date for the Participant’s benefit is after age 65 and occurs in a Limitation Year beginning on or after January 1, 2008, and the Plan has an immediately commencing straight life annuity payable at both age 65 and the age of benefit commencement, the Defined Benefit Dollar Limitation at the Participant’s Annuity Starting Date is the lesser of the limitation determined in paragraph (1), immediately above, and the Defined Benefit Dollar Limitation (adjusted for years of participation less than 10, if required) multiplied by the ratio of the annual amount of the adjusted immediately commencing straight life annuity under the Plan at the Participant’s Annuity Starting Date to the annual amount of the adjusted immediately commencing straight life annuity under the Plan at age 65, both determined without applying the limitations of this Appendix.  For this purpose, the adjusted immediately commencing straight life annuity under the Plan at the Participant’s Annuity Starting Date is the annual amount of such annuity payable to the Participant, computed disregarding the Participant’s accruals after age 65 but including actuarial adjustments even if those actuarial adjustments are used to offset accruals; and the adjusted immediately commencing straight life annuity under the Plan at age 65 is the annual amount of such annuity that would be payable under the Plan to a hypothetical Participant who is age 65 and has the same accrued benefit as the Participant.

(d)No Adjustment.  Notwithstanding (b) or (c) immediately above, no adjustment will be made to the Defined Benefit Dollar Limitation to reflect the probability of a Participant’s death between the Annuity Starting Date and age 62, or between age 65 and the Annuity Starting Date, as applicable, if benefits are not forfeited upon the death of the Participant prior to the Annuity Starting Date.  To the extent benefits are forfeited upon death before the Annuity Starting Date, such an adjustment will be made.  For this purpose, no forfeiture will be treated as occurring upon the Participant’s death if the Plan does not charge Participants for providing a qualified preretirement survivor annuity, as defined in Code Section 417(c) upon the Participant’s death.

(e)Minimum Benefit Permitted.  Notwithstanding anything in this Appendix to the contrary, the benefit otherwise accrued or payable to a Participant under this Plan will be deemed not to exceed the Maximum Permissible Benefit if:

(1)$10,000.  The retirement benefits payable for a Limitation Year under any form of benefit with respect to such Participant under this Plan and under all other defined benefit plans (without regard to whether a plan has been terminated) ever maintained by the Employer do not exceed $10,000 multiplied by a fraction — (I) the numerator of which is the Participant’s number of Years (or part thereof, but not less than one year) of Service (not to exceed 10) with the Employer, and (II) the denominator of which is 10; and

(2)No Defined Contribution Plan.  The Employer (or a Previous Employer) has not at any time maintained a defined contribution plan in which the Participant participated (for this purpose, mandatory Employee Contributions under a defined benefit plan, individual medical accounts under § Code Section 401(h), and accounts for postretirement medical benefits established under § 419A(d)(1) are not considered a separate defined contribution plan).

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1.10Previous Employer.  For purposes of this Appendix, if the Employer maintains a plan that provides a benefit the Participant accrued while performing services for a former Employer, the former Employer is a Previous Employer with respect to the Participant in the plan.  A former entity that antedates the Employer is also a Previous Employer with respect to a Participant if, under the facts and circumstances, the Employer constitutes a continuation of all or a portion of the trade or business of the former entity.

1.11Year of Participation.  The Participant will be credited with a Year of Participation (computed to fractional parts of a year) for each accrual computation period for which the following conditions are met:  (1) the Participant is credited with at least the number of hours of service (or period of service) for benefit accrual purposes, required under the terms of the plan in order to accrue a benefit for the accrual computation period, and (2) the Participant is included as a Participant under the eligibility provisions of the plan for at least one day of the accrual computation period.  If these two conditions are met, the portion of a year of participation credited to the Participant will equal the amount of benefit accrual service credited to the Participant for such accrual computation period.  A Participant who is permanently and totally disabled within the meaning of Code Section 415(c)(3)(C)(i) for an accrual computation period will receive a Year of Participation with respect to that period.  In no event will more than one Year of Participation be credited for any 12-month period.

1.12Year of Service.  For purposes of determining a Participant’s High Three-Year Average Remuneration, the Participant will be credited with a Year of Service (computed to fractional parts of a year) for each accrual computation period for which the Participant is credited with at least the number of hours of service (or period of service) for benefit accrual purposes, required under the terms of the Plan in order to accrue a benefit for the accrual computation period, taking into account only service with the Employer or a Previous Employer.

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APPENDIX II

DISTRIBUTION PROVISIONS

2.01Incorporation by Reference of 401(a)(9) Regulations.  Distributions from the Plan will be made in accordance with Regulations (currently including 1.401(a)(9)-1 through 1.401(a)(9)-9) under Code Section 401(a)(9), which include the minimum distribution incidental benefit requirement of Code Section 401(a)(9)(G)The provisions of this Appendix override any distribution options in the Plan that are inconsistent with Code Section 401(a)(9).

2.02401(a)(9) Deferral Limitations for Participants.  Notwithstanding anything to the contrary in this Plan, a Participant may not defer commencement of his or her benefits past his or her Required Beginning Date.  A Participant’s Required Beginning Date is April 1 of the calendar year following the later of (i) the calendar year in which the Participant attains age 70-1/2, or (ii) the calendar year in which the Participant has a severance from employment with all Affiliated Companies; provided, however, that the Required Beginning Date of a Participant who is a 5% owner will be determined without regard to clause (ii).

2.03Time and Manner of Distribution.

(a)Payment Period.  As of the first Distribution Calendar Year (defined below), distributions, if not made in a single sum, will be made over one of the following periods (or a combination thereof):  (1) the life of the Participant, (2) the life of the Participant and a Designated Beneficiary (defined below), (3) a period certain not extending beyond the life expectancy of the Participant, or (4) a period certain not extending beyond the joint and last survivor expectancy of the Participant and a Designated Beneficiary.  If a Participant dies after distributions begin (as described below), the remaining portion of that Participant’s benefit will continue to be distributed at least as rapidly as under the method of distribution in effect before the Participant’s death.

(b)Death of Participant Before Distributions Begin.  If the Participant dies before distributions begin, the Participant’s entire interest will be distributed, or begin to be distributed, no later than as follows:

(1)Spouse is Sole Beneficiary.  If the Participant’s surviving Spouse is the Participant’s sole Designated Beneficiary, then, except as provided in the Plan, distributions to the surviving Spouse will begin by December 31 of the calendar year immediately following the calendar year in which the Participant died, or by December 31 of the calendar year in which the Participant would have attained age 70-1/2, if later.  If the surviving Spouse is eligible to receive a single sum cash payment, the surviving Spouse must make this election by the earlier of the date that payments are required to begin under the preceding sentence or December 31 of the calendar year that contains the fifth anniversary of the Participant’s death.

(2)Spouse is not Sole Beneficiary.  If the Participant’s surviving Spouse is not the Participant’s sole Designated Beneficiary, then, except as provided in the Plan, distributions to the Designated Beneficiary will begin by December 31 of the calendar year immediately following the calendar year in which the Participant died unless the Designated Beneficiary properly elects, before the date that annuity payments are to begin, to receive a single sum cash payment.

II-1

(3)No Designated Beneficiary.  If there is no Designated Beneficiary as of September 30 of the calendar year following the calendar year of the Participant’s death, the Participant’s entire interest (if any) will be distributed by December 31 of the calendar year containing the fifth anniversary of the Participant’s death.

(4)Death of  Spouse.  If the Participant’s surviving Spouse is the Participant’s sole Designated Beneficiary and the surviving Spouse dies after the Participant but before distributions to the surviving Spouse are required to begin, this Section 2.03(b) other than 2.03(b)(1), will apply as if the surviving Spouse were the Participant.

For purposes of this Section 2.03 and Section 2.05, unless 2.03(b)(4) applies, distributions are considered to begin on the Participant’s Required Beginning Date.  If Section 2.03(b)(4) applies, distributions are considered to begin on the date distributions are required to begin to the surviving Spouse under Section 2.03(b)(1)).  If annuity payments irrevocably commence to the Participant before the Participant’s Required Beginning Date (or to the Participant’s surviving Spouse before the date distributions are required to begin to the surviving Spouse under Section 2.03(b)(1)), the date distributions are considered to begin is the date distributions actually commence.  In any event, if a Spouse or a non-Spouse Beneficiary elects a single sum cash payment, that cash payment must be made before December 31 of the calendar year that contains the fifth anniversary of the Participant’s death.

2.04Requirements For Joint Life Annuities Where the Beneficiary Is Not the Participant’s Spouse.  If the Participant’s interest is being distributed in the form of a Joint and Survivor Annuity for the joint lives of the Participant and a non-Spouse Beneficiary, annuity payments to be made on or after the Participant’s Required Beginning Date to the Designated Beneficiary after the Participant’s death must not at any time exceed the applicable percentage of the annuity payment for such period that would have been payable to the Participant using the table set forth in Regulation 1.401(a)(9)-6, Q&A 2(c)(2), in the manner described in Q&A 2(c)(1), to determine the applicable percentage.

2.05Definitions.

(a)Designated Beneficiary.  The individual who is designated as the Beneficiary and is the Designated Beneficiary under Code Section 401(a)(9) and applicable Regulations.

(b)Distribution Calendar Year.  A calendar year for which a minimum distribution is required.  For distributions beginning before the Participant’s death, the first Distribution Calendar Year is the calendar year immediately preceding the calendar year that contains the Participant’s Required Beginning Date.  For distributions beginning after the Participant’s death, the first Distribution Calendar Year is the calendar year in which distributions are required to begin pursuant to Section 2.03(b).

II-2

(c)Life Expectancy.  Life expectancy means life expectancy as computed by use of the Single Life Table in Regulation 1.401(a)(9)-9, Q&A-1.

(d)Required Beginning Date.  The date specified in Section 3.15(b) of the Plan.

2.06TEFRA 242(b) Election.  If a Participant made a written election, prior to January 1, 1984, to defer commencement of his or her distribution in a manner consistent with the Tax Equity and Fiscal Responsibility Act of 1982, such an election will be honored.

2.07Limitation of Benefits for 25 Highest Paid Employees.  To the extent required by law, benefits paid from this Plan to the 25 highest paid Employees are subject to the provisions of Regulation 1.401(a)(4)-5(b).

2.08Annuity Contracts.  Annuity contracts purchased and distributed under the Plan shall satisfy requirements of the Retirement Equity Act.

2.09Timing.  Subject to Regulation 1.411(a)-11(c)(7) and the provisions of this Plan, benefits to a Participant shall become distributable no later than 60 days after the last to occur of (a) the last day of the Plan Year in which the Participant attains age 65, (b) the last day of the Plan Year in which the Participant separates from employment with all Affiliated Companies, or (c) the 10th anniversary of the last day of the Plan Year in which the Participant commenced participation in the Plan.

2.10Small Benefits.  Since July 1, 2000, no mandatory distributions within the meaning of Q&A 2 of IRS Notice 2005-5 have been, or will be, paid from this frozen Plan because all remaining Plan benefits exceed $5,000.

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APPENDIX III

TOP HEAVY PROVISIONS

If the Plan became top heavy, certain Employees would receive vesting credit and benefits as described in this Appendix.

3.01Definitions.  For purposes of this Appendix:

(a)“Determination Date” means, in the case of the first Plan Year, the last day of that Plan Year or, in the case of any other Plan Year, the last day of the preceding Plan Year.  When more than one plan is aggregated, the determination of whether the plans are Top-Heavy will be made at a time consistent with Regulations.

(b)“Employer” includes the Company and its Affiliated Companies.

(c)“Key Employee” means any Employee or former Employee who at any time during the Plan Year containing the Determination Date was either:  (1) an officer having annual Remuneration greater than $130,000 (as adjusted under Code §416(i)); (2) a 5% owner of the Employer; or (3) a 1% owner of the Employer having annual Remuneration of more than $150,000.

For purposes of this definition, no more than 50 Employees (or, if less than 50, either 3 Employees or 10% of all Employees, whichever is greater) shall be treated as officers.  For purposes of determining the number of officers taken into account, Employees described in Code Section 414(q)(8) are excluded.  In addition, for purposes of determining ownership percentages, the constructive ownership rules of Code Section 318 shall apply as provided by Code Section 416(i)(1)(B).  If 2 Employees have the same interest in the Employer, the Employee having greater annual Remuneration from the Employer will be treated as having a larger interest.  For purposes of determining 5% and 1% owners, neither the aggregation rules nor the rules of subsections (b), (c), and (m) of Code Section 414 apply.  Inherited benefits will retain the character of the benefits of the Employee who performed services for the Employer.

(d)“Non-Key Employee” means any Employee who is not a Key Employee.

(e)“Permissive Aggregation Group” means any other plans that the Employer in its discretion, elects to aggregate with the Required Aggregation Group; provided that the resulting group of plans satisfies Code Sections 401(a)(4) and 410.

(f)“Required Aggregation Group” means (i) each plan of the Employer in which a Key Employee participates (regardless of whether the Plan has terminated), and (ii) each other plan of the Employer which enables any plan described in clause (i) to meet the requirements of Code Sections 401(a)(4) or 410.

(g)“Top-Heavy” means a plan in which, as of the Determination Date, the Top-Heavy Ratio exceeds 60%.

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(h)“Top-Heavy Ratio” means for the Plan or the Required Aggregation Group or Permissive Aggregation Group, as applicable, the fraction, the numerator of which is the sum of the account balances under the aggregated defined contribution plans of all Key Employees as of the Determination Date, including any part of any account balance distributed in the 1-year period ending on the Determination Date, and the present value of accrued benefits, including any part of any accrued benefit distributed in the 1-year period ending on the Determination Date, under the aggregated defined benefit plans of all Key Employees as of the Determination Date, and the denominator of which is the sum of all account balances, including any part of any account balance distributed in the 1-year period ending on the Determination Date, under the aggregated defined contribution plans for all Participants and the present value of accrued benefits under the defined benefit plans, including any part of any accrued benefit distributed in the 1-year period ending on the Determination Date, for all Participants as of the Determination Date.  If a distribution was made for a reason other than separation from service, death, or disability, “5-year period” is substituted for “1-year period” in this paragraph.

(1)The accrued benefit of a Participant other than a Key Employee shall be determined under the method, if any, that uniformly applies for accrual purposes under all defined benefit plans maintained by the Employer, or if no such method exists, as if such benefit accrued not more rapidly than the slowest accrual rate permitted under the fractional rule of Code Section 411(b)(1)(C).

(2)The accrued benefit for a defined contribution plan will be determined on the most recent valuation date within a 12-month period ending on the Determination Date.  The accrued benefit for a defined benefit plan will be determined on the valuation date used for computing plan costs for minimum funding.

(3)No accrued benefit for any Participant or Beneficiary will be taken into account for purposes of calculating the Top-Heavy Ratio with respect to a Participant who is not a Key Employee with respect to the Plan Year in question, but who was a Key Employee with respect to a prior Plan Year, or an Employee who has performed no services for any Affiliated Company within the 1-year period ending with the Determination Date, unless that Employee is reemployed after such 1-year period.

3.02Minimum Benefit Requirement.  To the extent required by Code Section 416, in any Plan Year in which the Plan is Top-Heavy, non-key employees who are covered by this Plan and also covered by a defined contribution plan sponsored by the Employer will receive at least a 5% minimum contribution under the defined contribution plan.

3.03Minimum Vesting Requirements.  All participants are 100% vested.

III-2

EX-21.01

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Exhibit 21.01

CALIFORNIA COASTAL COMMUNITIES, INC.
(DEBTOR-IN-POSSESSION)

WORLDWIDE SUBSIDIARY LIST
12/31/09

			Percentage Ownership		State/Country of Incorporation
Henley Facilities, Inc.				100	Delaware
New Henley Holdings Inc.				100	Delaware
	Air Correction International, Inc.			100	Delaware
	Henley Investments, Inc. Two			100	Delaware
	Procon International Inc.			100	Delaware
	Pullman Passenger Car Company Inc.			100	Delaware
	Trailmobile International Ltd.			100	Delaware
	Trailmobile Leasing Corp.			100	Delaware
	W.O.L. Corporation			100	Delaware
Signal Landmark Holdings Inc.				100	Delaware
	Signal Landmark			100	California
	Calumet Real Estate Inc.			100	Delaware
	Hearthside Residential Corp.			100	Delaware
Henley/KNO Holding Inc.				100	Delaware
Hearthside Holdings, Inc.				100	Delaware
	Hearthside Homes, Inc.			100	California
		Hearthside Homes Oxnard, L.L.C.		50	Delaware
		HHI Chandler, L.L.C.		100	California
		HHI Chino II, L.L.C.		100	California
		HHI Crosby, L.L.C.		100	California
		HHI Hellman, L.L.C.		100	California
		HHI Lancaster I, L.L.C.		100	California
		HHI Seneca, L.L.C.		100	California
WT/HRC Corporation				100	Illinois

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Exhibit 21.01

CALIFORNIA COASTAL COMMUNITIES, INC. (DEBTOR-IN-POSSESSION) WORLDWIDE SUBSIDIARY LIST 12/31/09

EX-23.1

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EXHIBIT 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statement 333-136105 on Form S-8 of our report dated March 30, 2010 relating to the consolidated financial statements of California Coastal Communities, Inc. and subsidiaries (Debtor-in-Possession) (the "Company") (which report expresses an unqualified opinion on those consolidated financial statements and includes explanatory paragraphs regarding the Company's bankruptcy proceedings and expressing substantial doubt as to the Company's ability to continue as a going concern) appearing in this Annual Report on Form 10-K of California Coastal Communities, Inc. and subsidiaries for the year ended December 31, 2009.

/s/ Deloitte & Touche LLP

Costa Mesa, California
March 30, 2010

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EXHIBIT 23.1

EX-31.1

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Exhibit 31.1

SECTION 302 CERTIFICATION

I, Raymond J. Pacini, certify that:

1.

I have reviewed this report on Form 10-K of California Coastal Communities, Inc.;



2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;



3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;



4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:



(a)

designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;



(b)

designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;



(c)

evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and



(d)

disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and



5.

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):



(a)

all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting that are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and



(b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: March 30, 2010

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

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Exhibit 31.1

EX-31.2

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Exhibit 31.2

SECTION 302 CERTIFICATION

I, Sandra G. Sciutto, certify that:

1.

I have reviewed this report on Form 10-K of California Coastal Communities, Inc.;



2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;



3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;



4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:



(a)

designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;



(b)

designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;



(c)

evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and



(d)

disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and



5.

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):



(a)

all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting that are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and



(b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: March 30, 2010

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

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Exhibit 31.2

EX-32.1

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Exhibit 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

        In connection with the Annual Report of California Coastal Communities, Inc. (the "Company") on Form 10-K for the year ended December 31, 2009, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), each of the undersigned, in their respective capacity as an officer, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of their respective knowledge, that:

•

the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

•

the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: March 30, 2010

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

/s/ SANDRA G. SCIUTTO
Sandra G. Sciutto
Senior Vice President and
Chief Financial Officer

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Exhibit 32.1