SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
Amendment No. 2
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2002
Or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to___________
Commission file number: 1-10153
HOMEFED CORPORATION
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(Exact Name of Registrant as Specified in its Charter)
Delaware 33-0304982
--------------------------------- ------------------------------------
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
1903 Wright Place
Suite 220
Carlsbad, California 92008
(760) 918-8200
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(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [x].
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [x]
Based on the average bid and asked prices of the Registrant's Common Stock as
published by the OTC Bulletin Board Service as of June 30, 2002, the aggregate
market value of the Registrant's Common Stock held by non-affiliates was
approximately $36,783,000 on that date.
As of March 14, 2003, there were 81,550,844 outstanding shares of the
Registrant's Common Stock, par value $.01 per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive proxy statement, to be filed with the
Commission for use in connection with the 2003 Annual Meeting of Stockholders
are incorporated by reference into Part III of this Form 10-K.
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1
EXPLANATORY NOTE
This Report on Form 10-K/A amends and restates the following items in
their entirety of the Annual Report on Form 10-K of HomeFed Corproation for the
fiscal year ended December 31, 2002. The purpose of this amendment is to: (1)
reflect in the balance sheet the increase in number of shares authorized from
100 million to 250 million, effective July 2002 and (2) correct non-material
information in Item 12 (Security Ownership of Certain Beneficial Owners and
Management). There are no other changes to the information as originally filed.
2
PART II
Item 8. Financial Statements and Supplementary Data.
- ------- --------------------------------------------
Financial Statements and supplementary data required by this Item 8 are set
forth at the pages indicated in Item 15(a) below.
PART III
Item 12. Security Ownership of Certain Beneficial Owners and Management.
- ------- --------------------------------------------------------------
Set forth below is certain information as of April 11, 2003 with respect to
the beneficial ownership determined in accordance with Rule 13d-3 under the
Securities Exchange act of 1934, as amended, of Common Stock by (i) each person
who, to the knowledge of the Company, is the beneficial owner of more than 5% of
the outstanding Common Stock (the Company's only class of voting securities),
(ii) each Director, (iii) the current executive officers named in the Summary
Compensation Table under "Executive Compensation," (iv) the Steinberg Children
Trusts and private charitable foundations established by Mr. Cumming and Mr.
Steinberg and (v) all executive officers and Directors of the Company as a
group.
Number of Shares
Name and Address and Nature of Percent
of Beneficial Owner Beneficial Ownership of Class
- ------------------- -------------------- --------
Leucadia National Corporation (a).................................. 24,742,268 30.3%
Patrick D. Bienvenue............................................... 10,750 (b) *
Paul J. Borden..................................................... 46,533 (c) *
Timothy M. Considine............................................... 15,609 (d) *
Ian M. Cumming..................................................... 7,732,364 (e)(f) 9.5%
R. Randy Goodson................................................... 791,000 (g) 1.0%
Michael A. Lobatz.................................................. 10,750 (b) *
Simon G. Malk...................................................... 575,844 (h) .7%
Curt R. Noland..................................................... 40,000 (i) *
Erin N. Ruhe....................................................... 40,000 (i) *
Joseph S. Steinberg................................................ 7,198,130 (f)(j) 8.8%
The Steinberg Children Trusts...................................... 893,258 (k) 1.1%
Cumming Foundation................................................. 73,297 (l) *
The Joseph S. and Diane H. Steinberg
1992 Charitable Trust......................................... 23,815 (m) *
All Directors and executive officers
as a group (11 persons)......................................... 16,481,980 (n) 19.9%
- -------------------
* Less than .1%.
(a) The business address of this beneficial owner is 315 Park Avenue
South, New York, New York 10010.
(b) Includes 750 common shares that may be acquired upon the exercise of
currently exercisable stock options.
(c) Includes 30,750 common shares that may be acquired upon the exercise
of currently exercisable stock options.
(d) Includes 4,859 shares held by the Seeseeanoh Inc. Retirement Plan. Mr.
Considine and his wife are the sole owners of Seeseeanoh, a real
estate company in San Diego, California. Also includes 8,250 shares
held by The Considine Family 1981 Trust, of which Mr. Considine and
his wife are trustees.
(e) Includes (i) 95,324 shares of Common Stock (.1%) beneficially owned by
Mr. Cumming's wife (directly and through trusts for the benefit of Mr.
Cumming's children of which Mr. Cumming's wife is trustee) as to which
Mr. Cumming may be deemed to be the beneficial owner and (ii) 750
shares that may be acquired upon the exercise of currently exercisable
stock options. Does not include 24,742,268 shares held by Leucadia
which Mr. Cumming may be deemed to beneficially own as a result of his
beneficial ownership of Leucadia common shares. See Item 13, "Certain
Relationships and Related Transactions."
3
(f) Messrs. Cumming and Steinberg have an oral agreement pursuant to which
they will consult with each other as to the election of a mutually
acceptable Board of Directors of the Company. The business address for
Messrs. Cumming and Steinberg is c/o Leucadia National Corporation,
315 Park Avenue South, New York, New York 10010.
(g) Includes 659,750 common shares that may be acquired upon the
exercise of currently exercisable stock options.
(h) Includes 355,250 common shares that may be acquired upon the
exercise of currently exercisable stock options.
(i) Includes 15,000 common shares that may be acquired upon the exercise
of currently exercisable stock options.
(j) Includes (i) 34,861 shares of Common Stock (less than .1%)
beneficially owned by Mr. Steinberg's wife as to which Mr. Steinberg
may be deemed to be the beneficial owner and (ii) 750 shares that may
be acquired upon the exercise of currently exercisable stock options.
Does not include 24,742,268 shares held by Leucadia which Mr.
Steinberg may be deemed to beneficially own as a result of his
beneficial ownership of Leucadia common shares. See Item 13, "Certain
Relationships and Related Transactions."
(k) Mr. Steinberg disclaims beneficial ownership of the Common Stock held
by the Steinberg Children Trusts.
(l) Mr. Cumming is a trustee and President of the foundation and disclaims
beneficial ownership of the Common Stock held by the foundation.
(m) Mr. Steinberg and his wife are trustees of the trust. Mr. Steinberg
disclaims beneficial ownership of the Common Stock held by the trust.
(n) Includes 1,084,750 shares of Common Stock that may be acquired upon
the exercise of currently exercisable stock options.
As of April 11, 2003, Cede & Co. held of record 44,863,093 shares of Common
Stock (approximately 55.0% of the total Common Stock outstanding). Cede & Co.
held such shares as a nominee for broker-dealer members of The Depository Trust
Company, which conducts clearing and settlement operations for securities
transactions involving its members.
Equity Compensation Plan Information
- ------------------------------------
The following table summarizes information regarding the Company's equity
compensation plans as of December 31, 2002. All outstanding awards relate to the
Company's common stock.
Number of securities
remaining available
for future issuance
Number of Securities Weighted-average under equity
to be issued upon exercise price of compensation plans
exercise of outstanding options, outstanding options, (excluding securities
warrants and rights warrants and rights reflected in column (a))
Plan Category (a) (b) (c)
- ------------- ------------------------------- -------------------- -------------------------
Equity compensation
plans approved by
security holders 1,197,250 $ .63 552,000
Equity compensation
plans not approved
by security holders -- -- --
--------- ------ -------
Total 1,197,250 $ .63 552,000
========= ====== =======
4
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
- ------- -----------------------------------------------------------------
(a)(1) Financial Statements.
Report of Independent Accountants F-1
Consolidated Balance Sheets at December 31, 2002 and 2001 F-2
Consolidated Statements of Operations for the years ended
December 31, 2002, 2001 and 2000 F-3
Consolidated Statements of Changes in Stockholders'
Equity (Deficit)for the years ended December 31, 2002, 2001
and 2000 F-4
Consolidated Statements of Cash Flows for the years
ended December 31, 2002, 2001 and 2000 F-5
Notes to Consolidated Financial Statements F-6
(a)(2) Financial Statement Schedules.
Schedules are omitted because they are not required or are not
applicable or the required information is shown in the financial
statements or notes thereto.
(a)(3) Executive Compensation Plans and Arrangements.
1999 Stock Incentive Plan (filed as Annex A to the Company's Proxy
Statement dated November 22, 1999).
2000 Stock Incentive Plan (filed as Annex B to the Company's Proxy
Statement dated June 20, 2000).
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K dated October 22, 2002
which set forth information under Item 2. Acquisition of Assets, Item
5. Other Events and Item 7. Financial Statements and Exhibits.
(c) Exhibits.
2.1 Amended Disclosure Statement to the Company's Fourth Amended Plan of
Reorganization dated July 15, 1994 (incorporated by reference to
Exhibit 2.1 to the Company's current report on Form 8-K dated June 14,
1995).
2.2 The Company's Fourth Amended Plan of Reorganization dated July 15,
1994 (incorporated by reference to Exhibit 2.2 to the Company's
current report on Form 8-K dated June 14, 1995).
2.3 Order Modifying and Confirming the Company's Fourth Amended Plan of
Reorganization dated July 15, 1994 (incorporated by reference to
Exhibit 2.3 to the Company's current report on Form 8-K dated June 14,
1995).
3.1 Restated Certificate of Incorporation, as restated July 3, 1995 of the
Company (incorporated by reference to Exhibit 3.1 to the Company's
quarterly report on Form 10-Q for the quarter ended September 30,
1995).
3.2 By-laws of the Company as amended through December 14, 1999
(incorporated by reference to Exhibit 3.2 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1999 (the "1999
10-K")).
5
3.3 Amendment to Amended and Restated Bylaws of the Company, dated July
10, 2002 (incorporated by reference to Exhibit 3.3 to the Company's
quarterly report on Form 10-Q for the quarter ended September 30,
2002).
3.4 Certificate of Amendment of the Certificate of Incorporation of the
Company, dated July 10, 2002 (incorporated by reference to Exhibit 3.4
to the Company's quarterly report on Form 10-Q for the quarter ended
September 30, 2002).
10.1 Loan Agreement dated July 3, 1995 between the Company and Leucadia
Financial Corporation ("LFC") and Form of 12% Secured Convertible Note
due July 3, 2003 (incorporated by reference to Exhibit 10.2 to the
Company's quarterly report on Form 10-Q for the quarter ended
September 30, 1995).
10.2 Paradise Valley Unit 1 First Closing Purchase Agreement and Escrow
Instructions, dated October 3, 1996, between Paradise Valley
Communities No. 1 and The Forecast Group (Registered Trade Name), L.P.
(incorporated by reference to Exhibit 10.1 to the Company's quarterly
report on Form 10-Q for the quarter ended September 30, 1996).
10.3 Paradise Valley Unit 2 First Closing Purchase Agreement and Escrow
Instructions, dated October 3, 1996, between Paradise Valley
Communities No. 1 and The Forecast Group (Registered Trade Name), L.P.
(incorporated by reference to Exhibit 10.2 to the Company's quarterly
report on Form 10-Q for the quarter ended September 30, 1996).
10.4 Paradise Valley Unit 1 Second Closing Purchase Agreement and Escrow
Instructions, dated October 3, 1996, between Paradise Valley
Communities No. 1 and The Forecast Group (Registered Trade Name), L.P.
(incorporated by reference to Exhibit 10.3 to the Company's quarterly
report on Form 10-Q for the quarter ended September 30, 1996).
10.5 Paradise Valley Unit 2 Second Closing Purchase Agreement and Escrow
Instructions, dated October 3, 1996, between Paradise Valley
Communities No. 1 and The Forecast Group (Registered Trade Name), L.P.
(incorporated by reference to Exhibit 10.4 to the Company's quarterly
report on Form 10-Q for the quarter ended September 30, 1996).
10.6 Paradise Valley Unit 3 Option to Purchase Real Property and Escrow
Instructions, dated October 3, 1996, between Paradise Valley
Communities No. 1 and The Forecast Group (Registered Trade Name), L.P.
(incorporated by reference to Exhibit 10.5 to the Company's quarterly
report on Form 10-Q for the quarter ended September 30, 1996).
10.7 Paradise Valley Unit 4 Option to Purchase Real Property and Escrow
Instructions, dated October 3, 1996, between Paradise Valley
Communities No. 1 and The Forecast Group (Registered Trade Name), L.P.
(incorporated by reference to Exhibit 10.6 to the Company's quarterly
report on Form 10-Q for the quarter ended September 30, 1996).
10.8 Real Estate Purchase Agreement and Escrow Instructions between
Southfork Partnership and Northfork Communities (incorporated by
reference to Exhibit 10.1 to the Company's quarterly report on Form
10-Q for the quarter ended June 30, 1998).
10.9 Purchase and Sale Agreement and Escrow Instructions, dated as of
September 21, 1999, by and between Paradise Valley Communities No. 1
and Western Pacific Housing, Inc. (incorporated by reference to
Exhibit 10 to the Company's quarterly report on Form 10-Q for the
quarter ended September 30, 1999).
10.10 Amended and Restated Loan Agreement between the Company and LFC, dated
as of August 14, 1998 (incorporated by reference to Exhibit 10.2 to
the Company's current report on Form 8-K dated August 14, 1998).
6
10.11 Development Management Agreement between the Company and Provence
Hills Development Company, LLC, dated as of August 14, 1998
(incorporated by reference to Exhibit 10.3 to the Company's current
report on Form 8-K dated August 14, 1998).
10.12 Stock Purchase Agreement between the Company and Leucadia National
Corporation, dated as of August 14, 1998 (incorporated by reference to
Exhibit 10.1 to the Company's current report on Form 8-K dated August
14, 1998).
10.13 Amended and Restated Limited Liability Company Agreement of Otay Land
Company, LLC, dated as of September 20, 1999, between the Company and
Leucadia National Corporation (incorporated by reference to Exhibit
10.16 to the Company's Registration Statement on Form S-2 (No.
333-79901) (the "Registration Statement")).
10.14 Stock Purchase Agreement, dated as of October 20, 1998, between the
Company and Leucadia National Corporation (incorporated by reference
to Exhibit 10.1 to the Company's quarterly report on Form 10-Q for the
quarter ended September 30, 1998).
10.15 Administrative Services Agreement, dated as of March 1, 2000, between
LFC, the Company, HomeFed Resources Corporation and HomeFed
Communities, Inc. (incorporated by reference to Exhibit 10.1 to the
Company's quarterly report on Form 10-Q for the quarter ended June 30,
2000).
10.16 Transitional Management Agreement, dated as of August 14, 1998, by and
between HomeFed and Accretive Investments, LLC (incorporated by
reference to Exhibit 10.17 to the Registration Statement).
10.17 Option and Purchase Agreement and Escrow Instructions, dated as of
October 15, 1999, by and between Otay Land Company, LLC and Lakes Kean
Argovitz Resorts-California, LLC. (incorporated by reference to
Exhibit 10.17 to the 1999 10-K).
10.18 First Amendment to Option and Purchase Agreement and Escrow
Instructions, dated as of December 8, 1999, by and between Otay Land
Company, LLC and Lakes Kean Argovitz Resorts-California, LLC
(incorporated by reference to Exhibit 10.18 to the Company's 1999
10-K).
10.19 Second Amendment to Option and Purchase Agreement and Escrow
Instructions, dated as of December 14, 1999, by and between Otay Land
Company, LLC and Lakes Kean Argovitz Resorts-California, LLC
(incorporated by reference to Exhibit 10.19 to the Company's 1999
10-K).
10.20 Purchase and Sale Agreement and Joint Escrow Instructions, dated as of
September 30, 1998, by and between Paradise Valley Communities No. 1
and Richmond American Homes of California, Inc. (incorporated by
reference to Exhibit 10.15 to the Registration Statement).
10.21 Amendment No. 1 dated as of November 1, 2000 to the Administrative
Services Agreement dated as of March 1, 2000 (incorporated by
reference to Exhibit 10.21 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 2000 (the "2000 10-K")).
10.22 Amendment No. 2 dated as of February 28, 2001 to the Administrative
Services Agreement dated as of March 1, 2000 (incorporated by
reference to Exhibit 10.22 to the Company's 2000 10-K).
10.23 Line Letter dated as of March 1, 2001 from LFC to the Company
(incorporated by reference to Exhibit 10.23 to the Company's 2000
10-K).
10.24 Deferred Compensation Agreement, dated as of March 6, 2000, between
the Company and Joseph S. Steinberg (incorporated by reference to
Exhibit 10.24 to the Company's Annual Report on Form 10-K/A for the
fiscal year ended December 31, 2000).
10.25 Amendment No. 1 dated as of March 1, 2002 to the Line Letter dated as
of March 1, 2001 from LFC to the Company (incorporated by reference to
Exhibit 10.25 to the Company's Annual Report on Form 10-K/A for the
fiscal year ended December 31, 2001).
7
10.26 Amendment No. 3 dated as of December 31, 2001 to the Administrative
Services Agreement dated as of March 1, 2000 (incorporated by
reference to Exhibit 10.26 to the Company's Annual Report on Form
10-K/A for the fiscal year ended December 31, 2001).
10.27 Third Amendment to Option and Purchase Agreement and Escrow
Instructions, dated as of June 21, 2002, by and between Otay Land
Company, LLC and Lakes Kean Argovitz Resorts - California, LLC
(incorporated by reference to Exhibit 10.27 to the Company's quarterly
report on Form 10-Q for the quarter ended June 30, 2002).
10.28 Stock Purchase Agreement dated as of October 21, 2002, by and between
HomeFed Corporation and Leucadia National Corporation (incorporated by
reference to Exhibit 10.1 to the Company's current report on Form 8-K
dated October 22, 2002).
10.29 Registration Rights Agreement dated as of October 21, 2002, by and
between HomeFed Corporation and Leucadia National Corporation
(incorporated by reference to Exhibit 10.2 to the Company's current
report on Form 8-K dated October 22, 2002).
10.30 Second Amendment and Restated Loan Agreement dated as of October 9,
2002, by and between HomeFed Corporation and Leucadia Financial
Corporation (incorporated by reference to Exhibit 10.3 to the
Company's current report on Form 8-K dated October 22, 2002).
10.31 Second Amendment and Restated Variable Rate Secured Note dated as of
October 9, 2002 (incorporated by reference to Exhibit 10.4 to the
Company's current report on Form 8-K dated October 22, 2002).
10.32 Amended and Restated Line Letter dated as of October 9, 2002, by and
between HomeFed Corporation and Leucadia Financial Corporation
(incorporated by reference to Exhibit 10.5 to the Company's current
report on Form 8-K dated October 22, 2002).
10.33 Amended and Restated Term Note dated as of October 9, 2002
(incorporated by reference to Exhibit 10.6 to the Company's current
report on Form 8-K dated October 22, 2002).
10.34 Amendment No. 4 dated as of May 28, 2002 to the Administrative
Services Agreement dated as of March 1, 2000 (previously filed).
10.35 Amendment No. 5 dated as of November 15, 2002 to the Administrative
Services Agreement dated as of March 1, 2000 (previously filed).
10.36 Amendment dated as of October 21, 2002 to the Development Management
Agreement dated as of August 14, 1998 (previously filed).
10.37 Contribution Agreement between the Company and San Elijo Hills
Development Company, LLC, dated as of October 21, 2002 (previously
filed).
10.38 Agreement and Guaranty, dated as of October 1, 2002 between Leucadia
National Corporation and CDS Holding Corporation (previously filed).
10.39 Obligation agreement, dated as of October 1, 2002, between Leucadia
National Corporation and San Elijo Ranch, Inc (previously filed).
21 Subsidiaries of the Company (previously filed).
99.1 Certification of Principal Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Principal Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
8
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this amendment to be signed
on its behalf by the undersigned, thereunto duly authorized.
HOMEFED CORPORATION
Date: May 22, 2003 By /s/ ERIN N. RUHE
-----------------------------
Erin N. Ruhe
Vice President and Controller
9
CERTIFICATIONS
I, Paul J. Borden, certify that:
1. I have reviewed this annual report on Form 10-K/A of HomeFed Corporation;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a- 14 and 15d- 14) for the registrant and have:
a) designed such disclosure controls and procedures 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 annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 22, 2003 By:/s/ Paul J. Borden
-------------------
Paul J. Borden
President
10
CERTIFICATIONS
I, Erin N. Ruhe, certify that:
1. I have reviewed this annual report on Form 10-K/A of HomeFed Corporation;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a- 14 and 15d- 14) for the registrant and have:
a) designed such disclosure controls and procedures 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 annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 22, 2003 By: /s/ Erin N. Ruhe
------------------------------
Erin N. Ruhe
Vice President and Controller
11
EXHIBIT INDEX
Exhibit Exemption
Number Description Indication
- ------ ----------- ----------
2.1 Amended Disclosure Statement to the Company's Fourth Amended Plan of
Reorganization dated July 15, 1994 (incorporated by reference to Exhibit
2.1 to the Company's current report on Form 8-K dated June 14, 1995).
2.2 The Company's Fourth Amended Plan of Reorganization dated July 15, 1994
(incorporated by reference to Exhibit 2.2 to the Company's current
report on Form 8-K dated June 14, 1995).
2.3 Order Modifying and Confirming the Company's Fourth Amended Plan of
Reorganization dated July 15, 1994 (incorporated by reference to Exhibit
2.3 to the Company's current report on Form 8-K dated June 14, 1995).
3.1 Restated Certificate of Incorporation, as restated July 3, 1995 of the
Company (incorporated by reference to Exhibit 3.1 to the Company's
quarterly report on Form 10-Q for the quarter ended September 30, 1995).
3.2 By-laws of the Company as amended through December 14, 1999
(incorporated by reference to Exhibit 3.2 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1999 (the "1999 10-K")).
3.3 Amendment to Amended and Restated Bylaws of the Company, dated July 10,
2002 (incorporated by reference to Exhibit 3.3 to the Company's
quarterly report on Form 10-Q for the quarter ended September 30, 2002).
3.4 Certificate of Amendment of the Certificate of Incorporation of the
Company, dated July 10, 2002 (incorporated by reference to Exhibit 3.4
to the Company's quarterly report on Form 10-Q for the quarter ended
September 30, 2002).
10.1 Loan Agreement dated July 3, 1995 between the Company and Leucadia
Financial Corporation ("LFC") and Form of 12% Secured Convertible Note
due July 3, 2003 (incorporated by reference to Exhibit 10.2 to the
Company's quarterly report on Form 10-Q for the quarter ended September
30, 1995).
10.2 Paradise Valley Unit 1 First Closing Purchase Agreement and Escrow
Instructions, dated October 3, 1996, between Paradise Valley Communities
No. 1 and The Forecast Group (Registered Trade Name), L.P. (incorporated
by reference to Exhibit 10.1 to the Company's quarterly report on Form
10-Q for the quarter ended September 30, 1996).
10.3 Paradise Valley Unit 2 First Closing Purchase Agreement and Escrow
Instructions, dated October 3, 1996, between Paradise Valley Communities
No. 1 and The Forecast Group (Registered Trade Name), L.P. (incorporated
by reference to Exhibit 10.2 to the Company's quarterly report on Form
10-Q for the quarter ended September 30, 1996).
10.4 Paradise Valley Unit 1 Second Closing Purchase Agreement and Escrow
Instructions, dated October 3, 1996, between Paradise Valley Communities
No. 1 and The Forecast Group (Registered Trade Name), L.P. (incorporated
by reference to Exhibit 10.3 to the Company's quarterly report on Form
10-Q for the quarter ended September 30, 1996).
10.5 Paradise Valley Unit 2 Second Closing Purchase Agreement and Escrow
Instructions, dated October 3, 1996, between Paradise Valley Communities
No. 1 and The Forecast Group (Registered Trade Name), L.P. (incorporated
by reference to Exhibit 10.4 to the Company's quarterly report on Form
10-Q for the quarter ended September 30, 1996).
12
10.6 Paradise Valley Unit 3 Option to Purchase Real Property and Escrow
Instructions, dated October 3, 1996, between Paradise Valley Communities
No. 1 and The Forecast Group (Registered Trade Name), L.P. (incorporated
by reference to Exhibit 10.5 to the Company's quarterly report on Form
10-Q for the quarter ended September 30, 1996).
10.7 Paradise Valley Unit 4 Option to Purchase Real Property and Escrow
Instructions, dated October 3, 1996, between Paradise Valley Communities
No. 1 and The Forecast Group (Registered Trade Name), L.P. (incorporated
by reference to Exhibit 10.6 to the Company's quarterly report on Form
10-Q for the quarter ended September 30, 1996).
10.8 Real Estate Purchase Agreement and Escrow Instructions between Southfork
Partnership and Northfork Communities (incorporated by reference to
Exhibit 10.1 to the Company's quarterly report on Form 10-Q for the
quarter ended June 30, 1998).
10.9 Purchase and Sale Agreement and Escrow Instructions, dated as of
September 21, 1999, by and between Paradise Valley Communities No. 1 and
Western Pacific Housing, Inc. (incorporated by reference to Exhibit 10
to the Company's quarterly report on Form 10-Q for the quarter ended
September 30, 1999).
10.10 Amended and Restated Loan Agreement between the Company and LFC, dated
as of August 14, 1998 (incorporated by reference to Exhibit 10.2 to the
Company's current report on Form 8-K dated August 14, 1998).
10.11 Development Management Agreement between the Company and Provence Hills
Development Company, LLC, dated as of August 14, 1998 (incorporated by
reference to Exhibit 10.3 to the Company's current report on Form 8-K
dated August 14, 1998).
10.12 Stock Purchase Agreement between the Company and Leucadia National
Corporation, dated as of August 14, 1998 (incorporated by reference to
Exhibit 10.1 to the Company's current report on Form 8-K dated August
14, 1998).
10.13 Amended and Restated Limited Liability Company Agreement of Otay Land
Company, LLC, dated as of September 20, 1999, between the Company and
Leucadia National Corporation (incorporated by reference to Exhibit
10.16 to the Company's Registration Statement on Form S-2 (No.
333-79901) (the "Registration Statement")).
10.14 Stock Purchase Agreement, dated as of October 20, 1998, between the
Company and Leucadia National Corporation (incorporated by reference to
Exhibit 10.1 to the Company's quarterly report on Form 10-Q for the
quarter ended September 30, 1998).
10.15 Administrative Services Agreement, dated as of March 1, 2000, between
LFC, the Company, HomeFed Resources Corporation and HomeFed Communities,
Inc. (incorporated by reference to Exhibit 10.1 to the Company's
quarterly report on Form 10-Q for the quarter ended June 30, 2000).
10.16 Transitional Management Agreement, dated as of August 14, 1998, by and
between HomeFed and Accretive Investments, LLC (incorporated by
reference to Exhibit 10.17 to the Registration Statement).
10.17 Option and Purchase Agreement and Escrow Instructions, dated as of
October 15, 1999, by and between Otay Land Company, LLC and Lakes Kean
Argovitz Resorts-California, LLC (incorporated by reference to Exhibit
10.17 to the Company's 1999 10-K).
10.18 First Amendment to Option and Purchase Agreement and Escrow
Instructions, dated as of December 8, 1999, by and between Otay Land
Company, LLC and Lakes Kean Argovitz Resorts-California, LLC
(incorporated by reference to Exhibit 10.18 to the Company's 1999 10-K).
10.19 Second Amendment to Option and Purchase Agreement and Escrow
Instructions, dated as of December 14, 1999, by and between Otay Land
Company, LLC and Lakes Kean Argovitz Resorts-California, LLC
(incorporated by reference to Exhibit 10.19 to the Company's 1999 10-K).
10.20 Purchase and Sale Agreement and Joint Escrow Instructions, dated as of
September 30, 1998, by and between Paradise Valley Communities No. 1 and
Richmond American Homes of California, Inc. (incorporated by reference
to Exhibit 10.15 to the Registration Statement).
10.21 Amendment No. 1 dated as of November 1, 2000 to the Administrative
Services Agreement dated as of March 1, 2000 (incorporated by reference
to Exhibit 10.21 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2000 (the "2000 10-K")).
10.22 Amendment No. 2 dated as of February 28, 2001 to the Administrative
Services Agreement dated as of March 1, 2000 (incorporated by reference
to Exhibit 10.22 to the Company's 2000 10-K).
13
10.23 Line Letter dated as of March 1, 2001 from LFC to the Company
(incorporated by reference to Exhibit 10.23 to the Company's 2000 10-K).
10.24 Deferred Compensation Agreement, dated as of March 6, 2000, between the
Company and Joseph S. Steinberg (incorporated by reference to Exhibit
10.24 to the Company's Annual Report on Form 10-K/A for the fiscal year
ended December 31, 2000).
10.25 Amendment No. 1 dated as of March 1, 2002 to the Line Letter dated as of
March 1, 2001 from LFC to the Company (incorporated by reference to
Exhibit 10.25 to the Company's Annual Report on Form 10-K/A for the
fiscal year ended December 31, 2001).
10.26 Amendment No. 3 dated as of December 31, 2001 to the Administrative
Services Agreement dated as of March 1, 2000 (incorporated by reference
to Exhibit 10.26 to the Company's Annual Report on Form 10-K/A for the
fiscal year ended December 31, 2001).
10.27 Third Amendment to Option and Purchase Agreement and Escrow
Instructions, dated as of June 21, 2002, by and between Otay Land
Company, LLC and Lakes Kean Argovitz Resorts - California, LLC
(incorporated by reference to Exhibit 10.27 to the Company's quarterly
report on Form 10-Q for the quarter ended June 30, 2002).
10.28 Stock Purchase Agreement dated as of October 21, 2002, by and between
HomeFed Corporation and Leucadia National Corporation (incorporated by
reference to Exhibit 10.1 to the Company's current report on Form 8-K
dated October 22, 2002).
10.29 Registration Rights Agreement dated as of October 21, 2002, by and
between HomeFed Corporation and Leucadia National Corporation
(incorporated by reference to Exhibit 10.2 to the Company's current
report on Form 8-K dated October 22, 2002).
10.30 Second Amendment and Restated Loan Agreement dated as of October 9,
2002, by and between HomeFed Corporation and Leucadia Financial
Corporation (incorporated by reference to Exhibit 10.3 to the Company's
current report on Form 8-K dated October 22, 2002).
10.31 Second Amendment and Restated Variable Rate Secured Note dated as of
October 9, 2002 (incorporated by reference to Exhibit 10.4 to the
Company's current report on Form 8-K dated October 22, 2002).
10.32 Amended and Restated Line Letter dated as of October 9, 2002, by and
between HomeFed Corporation and Leucadia Financial Corporation
(incorporated by reference to Exhibit 10.5 to the Company's current
report on Form 8-K dated October 22, 2002).
10.33 Amended and Restated Term Note dated as of October 9, 2002 (incorporated
by reference to Exhibit 10.6 to the Company's current report on Form 8-K
dated October 22, 2002).
10.34 Amendment No. 4 dated as of May 28, 2002 to the Administrative Services
Agreement dated as of March 1, 2000 (previously filed).
10.35 Amendment No. 5 dated as of November 15, 2002 to the Administrative
Services Agreement dated as of March 1, 2000 (previously filed).
10.36 Amendment dated as of October 21, 2002 to the Development Management
Agreement dated as of August 14, 1998 (previously filed).
10.37 Contribution Agreement between the Company and San Elijo Hills
Development Company, LLC, dated as of October 21, 2002 (previously
filed).
10.38 Agreement and Guaranty, dated as of October 1, 2002, between Leucadia
National Corporation and CDS Holding Corporation (previously filed).
10.39 Obligation Agreement, dated as of October 1, 2002, between Leucadia
National Corporation and San Elijo Ranch, Inc (previously filed).
21 Subsidiaries of the Company (previously filed).
99.1 Certification of Principal Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
99.2 Certification of Principal Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
14
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of HomeFed Corporation:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, changes in stockholders' equity
(deficit) and cash flows, present fairly, in all material respects, the
financial position of HomeFed Corporation and Subsidiaries (the "Company") as of
December 31, 2002 and 2001, and the results of their operations, changes in
stockholders' equity (deficit) and their cash flows for each of the three years
in the period ended December 31, 2002, in conformity with accounting principles
generally accepted in the United States of America. 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 of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management and evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
New York, New York
March 14, 2003
F-1
HOMEFED CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2002 and 2001
(Dollars in thousands, except par value)
2002 2001
---- ----
ASSETS
Real estate $ 31,108 $ 23,890
Cash and cash equivalents 33,601 1,454
Deposits and other assets 1,026 460
Deferred income taxes 44,742 --
Note receivable 6,566 --
--------- ---------
TOTAL $ 117,043 $ 25,804
========= =========
LIABILITIES
Note payable to Leucadia Financial Corporation $ 23,628 $ 22,508
Notes payable to trust deed holders 16,704 --
Deferred revenue 32,621 --
Accounts payable and accrued liabilities 6,323 1,711
Liability for environmental remediation 10,816 --
Income taxes payable 2,875 --
Other liabilities 7,294 --
--------- ---------
Total liabilities 100,261 24,219
--------- ---------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST 15,132 13,208
--------- ---------
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $.01 par value, 250,000,000 and 100,000,000 shares
authorized; 81,550,844 and 56,808,076 shares outstanding 816 568
Additional paid-in capital 379,630 355,377
Deferred compensation pursuant to stock incentive plans (418) (276)
Accumulated deficit (378,378) (367,292)
--------- ---------
Total stockholders' equity (deficit) 1,650 (11,623)
--------- ---------
TOTAL $ 117,043 $ 25,804
========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
F-2
HOMEFED CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
For the years ended December 31, 2002, 2001 and 2000
(In thousands, except per share amounts)
2002 2001 2000
-------- ------- --------
REVENUES
Sales of real estate $ 9,259 $ -- $ 1,575
Co-op marketing and advertising fees 1,942 1,028 44
Development management fee income from San Elijo Hills 1,610 4,775 3,464
Income from options on real estate properties 300 720 92
-------- -------- --------
13,111 6,523 5,175
-------- -------- --------
EXPENSES
Cost of sales 2,815 -- 1,544
Provision for environmental remediation 11,160 -- --
Interest expense relating to Leucadia Financial Corporation 2,780 2,646 2,510
General and administrative expenses 5,543 4,179 3,445
Administrative services fees to Leucadia Financial Corporation 120 107 255
-------- -------- --------
22,418 6,932 7,754
-------- -------- --------
Loss from operations (9,307) (409) (2,579)
-------- -------- --------
Other income, net 311 699 162
-------- -------- --------
Income (loss) before income taxes and minority interest (8,996) 290 (2,417)
Income tax (provision) benefit (379) (667) 8
-------- -------- --------
Loss before minority interest (9,375) (377) (2,409)
Minority interest (1,711) (1,000) (1,000)
-------- -------- --------
Net loss $(11,086) $ (1,377) $ (3,409)
======== ======== ========
Basic loss per common share $ (0.18) $ (0.02) $ (0.06)
======== ======== ========
Diluted loss per common share $ (0.18) $ (0.02) $ (0.06)
======== ======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
HOMEFED CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity (Deficit)
For the years ended December 31, 2002, 2001 and 2000
(Dollars in thousands, except par value)
Deferred
Common Compensation
Stock Additional Pursuant to Total
$.01 Par Paid-in Stock Incentive Accumulated Stockholders'
Value Capital Plans Deficit Equity (Deficit)
-------- --------- --------------- ----------- ----------------
Balance, January 1, 2000 $ 566 $354,833 $(362,506) $ (7,107)
Issuance of 250,000 shares of Common
Stock related to restricted stock grants 2 186 $(188) --
Amortization of restricted stock grants 51 51
Grant of 25,000 stock options 18 (18) --
Grant of 1,000,000 stock options 240 (240) --
Amortization related to stock options 44 44
Net loss (3,409) (3,409)
------ -------- ----- --------- --------
Balance, December 31, 2000 568 355,277 (351) (365,915) (10,421)
Amortization of restricted stock grants 63 63
Amortization related to stock options 112 112
Change in value of performance-based
stock options 100 (100) --
Net loss (1,377) (1,377)
------ -------- ----- --------- --------
Balance, December 31, 2001 568 355,377 (276) (367,292) (11,623)
Issuance of 24,742,268 shares of Common
Stock 248 23,752 24,000
Amortization of restricted stock grants 63 63
Amortization related to stock options 295 295
Change in value of performance-based
stock options 500 (500) --
Exercise of options to purchase Common
Shares 1 1
Net loss (11,086) (11,086)
------ -------- ----- --------- --------
Balance, December 31, 2002 $ 816 $379,630 $(418) $(378,378) $ 1,650
====== ======== ===== ========= ========
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
HOMEFED CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the years ended December 31, 2002, 2001 and 2000
(In thousands)
2002 2001 2000
-------- ------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(11,086) $(1,377) $(3,409)
Adjustments to reconcile net loss to net cash provided by (used for)
operating activities:
Minority interest 1,711 1,000 1,000
Provision for deferred income taxes 363 -- --
Provision for environmental remediation 11,160 -- --
Amortization of deferred compensation pursuant to stock incentive plans 358 175 95
Amortization of debt discount on note payable to Leucadia Financial
Corporation 1,120 1,034 922
Changes in operating assets and liabilities:
Real estate (6,855) (911) 728
Deposits and other assets 169 (252) (50)
Note receivable (6,566) -- --
Liability for environmental remediation (344) -- --
Recreation center liability -- (41) (929)
Deferred revenue 19,792 -- --
Accounts payable and accrued liabilities 183 195 (389)
Income taxes payable 286 -- --
Other liabilities 6,480 -- --
Increase in restricted cash -- -- 868
-------- -------- --------
Net cash provided by (used for) operating activities 16,771 (177) (1,164)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of CDS, net of cash acquired 18,979 -- --
-------- -------- --------
Net cash provided by investing activities 18,979 -- --
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under credit agreement with Leucadia Financial
Corporation 2,150 900 --
Payments related to credit agreement with Leucadia Financial
Corporation (2,150) (900) --
Distribution to minority interest (2,524) -- --
Payments to trust deed note holders (1,080) -- --
Exercise of options to purchase common shares 1 -- --
-------- -------- --------
Net cash used for financing activities (3,603) -- --
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 32,147 (177) (1,164)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,454 1,631 2,795
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 33,601 $ 1,454 $ 1,631
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 1,660 $ 1,612 $ 1,588
======== ======== ========
Cash paid (refunded) for income taxes $ (279) $ 668 $ (16)
======== ======== ========
NON-CASH INVESTING ACTIVITIES:
Common stock issued for acquisition of CDS $ 24,000 $ -- $ --
======== ======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
HOMEFED CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The accompanying consolidated financial statements
include the accounts of HomeFed Corporation (the "Company"), Otay Land Company,
LLC ("Otay Land Company") and the Company's wholly-owned subsidiaries, HomeFed
Communities, Inc., HomeFed Resources Corporation and, since its acquisition in
October 2002, CDS Holding Corporation and its majority owned subsidiaries
("CDS"). The Company is engaged, directly and through its subsidiaries, in the
investment in and development of residential real estate properties in the state
of California. All significant intercompany balances and transactions have been
eliminated in consolidation.
The Company's business, real estate development, is highly competitive, and
there are numerous residential real estate developers and development projects
operating in the same geographic area in which the Company operates. In
addition, the residential real estate development industry is subject to
increasing environmental, building, zoning and real estate regulations that are
imposed by various federal, state and local authorities. Timing of the
initiation and completion of development projects depends upon receipt of
necessary authorizations and approvals. Furthermore, changes in prevailing local
circumstances or applicable laws may require additional approvals, or
modifications of approvals previously obtained. Delays could adversely affect
the Company's ability to complete its projects, significantly increase the costs
of doing so or drive potential customers to purchase competitors' products.
Environmental laws may cause the Company to incur substantial compliance,
mitigation and other costs, may restrict or prohibit development in certain
areas and may delay completion of the Company's development projects. Delays
arising from compliance with environmental laws and regulations could adversely
affect the Company's ability to complete its projects, significantly increase
the costs of doing so or cause potential customers to purchase competitors'
products. The Company's business may also be adversely affected by inflation and
is interest-rate sensitive.
Certain amounts for prior periods have been reclassified to be consistent
with the 2002 presentation.
Critical Accounting Policies and Estimates - The preparation of financial
statements in conformity with generally accepted accounting principles requires
the Company to make estimates and assumptions that affect the reported amounts
in the financial statements and disclosures of contingent assets and
liabilities. On an on-going basis, the Company evaluates all of these estimates
and assumptions. Actual results could differ from those estimates.
Acquisition Accounting of CDS - In order to determine the book values of
the acquired assets and liabilities, generally accepted accounting principles
require an initial allocation of the purchase price among CDS's individual
assets and liabilities to be based upon their relative fair values at the date
of acquisition, which were primarily determined based upon independent
third-party appraisals. Further, since the Company believes that the acquisition
of CDS will enable it to generate taxable income that will be offset by some of
the Company's net operating loss carryforwards ("NOLs"), it must record a
deferred tax asset in the purchase price allocation. If the aggregate fair
values of the net assets acquired exceed the purchase price, as was the case
with CDS, generally accepted accounting principles require that the excess be
applied to reduce the fair values of certain non-current assets, but not to
reduce the deferred tax asset. As a result of the application of these rules, at
the date of acquisition the purchase price was primarily allocated to cash and
cash equivalents of approximately $20,000,000, the deferred tax asset of
approximately $45,100,000, and only immaterial amounts were allocated to
non-current assets, including real estate. The deferred tax asset recognized
represents the tax effect of the NOLs that the Company expects to use to offset
its future taxable income and the tax effect of the difference between the book
and tax bases of CDS's assets and liabilities.
F-6
The amount recorded as a deferred tax asset was based on forecasted taxable
income of approximately $160,000,000. This estimate was based upon numerous
assumptions about the future, including future market conditions where the
Company's projects are located, regulatory requirements, estimates of future
real estate revenues and development costs, the ability of the Company to
realize taxable profits prior to the expiration of its NOLs, future interest
expense, operating and overhead costs and other factors. In addition, the
calculation of the deferred tax asset also recognizes that a substantial
majority of the Company's NOLs will not be available to offset alternative
minimum taxable income, which is currently taxed at a federal tax rate of 20%.
To the extent the Company's actual taxable income in the future exceeds its
estimate, the Company will recognize additional tax benefits; conversely, if the
actual taxable income is less than the amounts projected, an addition to the
valuation allowance would be recorded that would increase tax expense.
Profit Recognition on Sales of Real Estate - Profit from the sale of real
estate is recognized in full at the time title is conveyed to the buyer if the
profit is determinable, collectibility of the sales price is reasonably assured
(demonstrated by meeting minimum down payment and continuing investment
requirements), and the earnings process is virtually complete, such that the
seller is not obligated to perform significant activities after the sale and has
transferred to the buyer the usual risks and rewards of ownership. When it is
determined that all the conditions for full profit recognition have not been
met, revenue and profit is deferred using the deposit, installment, cost
recovery or percentage of completion method of accounting, as appropriate
depending upon the specific terms of the transaction.
Determining the amount of revenue and profit to be deferred when the
Company remains obligated to perform significant activities after the sale
requires an estimate of the cost of those future activities, and an allocation
of the profit to be recognized between performance at the date of the sale and
when the future activities are completed. The Company believes it can reasonably
estimate its future costs and profit allocation, however, such estimates are
based on numerous assumptions and require management's judgment. Actual costs
that are higher or lower than the Company's estimates will impact its
recognition of profit in the future.
Provision for Losses on Real Estate - The Company's real estate is carried
at the lower of cost or fair value less costs to sell. Management periodically
assesses the recoverability of its real estate investments by comparing the
carrying amount with their fair value less costs to sell. The process involved
in the determination of fair value requires estimates as to future events and
market conditions. This estimation process assumes the Company has the 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.
When management determines that the carrying value of specific real estate
investments should be reduced to properly record these assets at fair value less
costs to sell, this write-down is recorded as a charge to current period
operations. The provisions are based on estimates and the ultimate loss may
differ from those estimates.
Income Taxes - The Company records a valuation allowance to reduce its
deferred tax asset to an amount that the Company expects is more likely than not
to be realized. If the Company's estimate of the realizability of its deferred
tax asset changes in the future, an adjustment to increase or decrease income
would be recorded in such period. The valuation allowance is determined after
considering all relevant facts and circumstances, but is significantly
influenced by the Company's projection of taxable income in the future. Since
any projection of future profitability is inherently unreliable, changes in the
valuation allowance should be expected.
Provision for Environmental Remediation - The Company records environmental
liabilities when it is probable that a liability has been incurred and the
amount or range of the liability is reasonably estimable. The Company has
obtained a preliminary remediation study concerning 34 acres of undeveloped land
owned by Otay Land Company. The need for remediation results from activities
conducted on the land prior to the Company's ownership. Based upon the
preliminary findings of this study, the Company has estimated that the cost to
implement the most likely remediation alternative would be approximately
$11,200,000. The Company accrued that amount as an operating expense in 2002.
The estimated liability is neither discounted nor reduced for potential claims
for recovery from previous owners and users of the land who may be liable, and
may increase or decrease based upon the actual extent and nature of the
remediation required, the type of remedial process approved, the expenses of the
regulatory process, inflation and other items. The Company is under no immediate
obligation to commence remediation. The Company is currently interviewing
various environmental specialists and evaluating alternative remediation
processes which may impact the total cost. Although this estimated liability is
the Company's current best estimate, no assurance can be given that the actual
amount of environmental liability will not exceed the amount of reserves for
this matter or that it will not have a material adverse effect on the Company's
financial position, results of operations or cash flows.
F-7
Real Estate - Real estate, which consists of land held for development and
sale, includes all expenditures incurred in connection with the acquisition,
development and construction of the property, including interest and property
taxes. Land costs are allocated to lots based on relative fair values prior to
development and are charged to cost of sales at the time of sale.
Cash and Cash Equivalents - Cash equivalents are money market accounts and
short-term, highly liquid investments that are readily convertible to cash.
Recognition of Fee Income - The Company receives co-op marketing and
advertising fees from the San Elijo Hills project that are paid at the time
builders sell homes, are generally based upon a fixed percentage of the homes'
selling price, and are recorded as revenue when the home is sold. Prior to its
acquisition of CDS, the Company recognized fee income for field overhead and
management services from the San Elijo Hills project when contractually earned.
Capitalization of Interest and Real Estate Taxes - Interest and real estate
taxes attributable to land and property construction are capitalized and added
to the cost of those properties while the properties are being actively
developed.
Stock-Based Compensation - Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation", ("SFAS 123"), establishes a fair
value method for accounting for stock-based compensation plans, either through
recognition in the statements of operations or disclosure. As permitted, the
Company applies APB Opinion No. 25 and related Interpretations in accounting for
its plans. Accordingly, no compensation cost has been recognized in the
statements of operations related to employees and directors under its stock
compensation plans. Had compensation cost for the Company's fixed stock options
been recorded in the statements of operations consistent with the provisions of
SFAS 123, the Company's net loss and loss per share would not have been
materially different from that reported in 2002, 2001 and 2000.
Recently Issued Accounting Standards - In July 2002, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities" ("SFAS 146"), which is effective for exit or disposal activities
initiated after December 31, 2002. SFAS 146 addresses issues regarding the
recognition, measurement and reporting of costs associated with exit and
disposal activities, including restructuring activities. SFAS 146 requires a
liability be recognized at fair value for costs associated with exit or disposal
activities only when the liability is incurred as opposed to at the time the
Company commits to an exit plan as permitted under Emerging Issues Task Force
Issue No. 94-3. In November 2002, the FASB issued FASB Interpretation No. 45
("FIN 45"), which requires a guarantor for certain guarantees to recognize, at
the inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The initial recognition and initial
measurement provisions of FIN 45 are applied on a prospective basis to
guarantees issued or modified after December 31, 2002. In addition, FIN 45
modified the disclosure requirements for such guarantees effective for interim
or annual periods ending after December 15, 2002. In January 2003, the FASB
issued FASB Interpretation No. 46 ("FIN 46"), which addresses consolidation of
variable interest entities, which are entities in which equity investors do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective immediately to variable interest entities created after January 31,
2003, and to variable interest entities in which an enterprise obtains an
interest after that date. FIN 46 applies in the first fiscal year or interim
period beginning after June 15, 2003, to variable interest entities in which an
enterprise holds a variable interest that it acquired before February 1, 2003.
FIN 46 may be applied prospectively with a cumulative-effect adjustment as of
the date on which it is first applied or by restating previously issued
financial statements with a cumulative-effect adjustment as of the beginning of
the first year restated. The Company does not currently expect that the
implementation of these standards will have a material effect on the Company's
consolidated results of operations or financial condition.
F-8
2. ACQUISITION
On October 21, 2002, the Company purchased from Leucadia National
Corporation ("Leucadia") all of the issued and outstanding shares of capital
stock of CDS which, through its majority-owned indirect subsidiary, San Elijo
Hills Development Company, LLC ("San Elijo"), is the owner of the San Elijo
Hills project, a master-planned community located in the City of San Marcos, in
San Diego County, California. Since August 1998, the Company has been the
development manager for the San Elijo Hills project, for which it was entitled
to participate in the net cash flow of the project through the payment of a
success fee, and receive fees for the field overhead, management and marketing
services it provides, based on the revenues of the project. No success fee had
been paid prior to the Company's acquisition of CDS.
The purchase price of $25,000,000 consisted of $1,000,000 in cash and
24,742,268 shares of the Company's common stock, which represents approximately
30.3% of the Company's outstanding common shares. Prior to the acquisition,
Leucadia had also committed to continue to provide to San Elijo project
improvement bonds which are required prior to the commencement of any project
development. The results of CDS have been included in the Company's consolidated
results of operations from the date of acquisition.
The acquisition balance sheet of CDS is as follows (in thousands):
Assets:
- -------
Real estate $ 139
Cash and cash equivalents 19,979
Investments 275
Deposits and other assets 460
Deferred income taxes 45,105
-------
Total assets acquired 65,958
-------
Liabilities:
- ------------
Notes payable to trust deed holders 17,560
Deferred revenue 12,829
Accounts payable and accrued liabilities 4,429
Other liabilities 3,403
-------
Total liabilities assumed 38,221
-------
Minority Interest 2,737
-------
Purchase Price $25,000
=======
The following unaudited pro forma financial information presents results
for the years ended December 31, 2002 and 2001 as if the acquisition had
occurred at the beginning of the respective periods (in thousands, except per
share amounts):
2002 2001
---- ----
Sales of real estate $33,920 $80,721
Total revenues $36,162 $82,469
Income (loss) from operations $(2,441) $26,139
Minority interest $(2,124) $(3,337)
Net income (loss) $(3,110) $14,505
Basic earnings (loss) per common share $ (.04) $ .18
Diluted earnings (loss) per common share $ (.04) $ .18
The unaudited pro forma financial information is provided for informational
purposes only and is not necessarily indicative of either the Company's
operating results that would have occurred had the acquisition been consummated
at the beginning of the respective periods, or of the Company's future operating
results.
F-9
3. REAL ESTATE
A summary of real estate by project is as follows (in thousands):
December 31,
-----------------------
2002 2001
---- ----
Otay Ranch $23,856 $22,823
San Elijo Hills 6,023 --
Paradise Valley 1,229 1,067
------- -------
Total $31,108 $23,890
======= =======
Interest totaling $224,000, related to the San Elijo Hills project, was
incurred and capitalized in real estate during 2002. No interest was capitalized
during 2001. All of the San Elijo Hills project land is pledged as collateral
for the notes payable to trust deed holders described in Note 5, below.
4. NOTE RECEIVABLE
In December 2002, CDS sold 92 residential sites at the San Elijo Hills
project to a home builder for net proceeds of $23,657,000, consisting of cash of
$17,091,000 and a non-interest bearing note receivable in the amount of
$6,566,000. The note matures upon the completion of certain improvements to the
property, but cannot exceed one year. The note is secured by a first trust deed
on the property.
5. INDEBTEDNESS
As of August 14, 1998, the Company and Leucadia Financial Corporation
("LFC"), a subsidiary of Leucadia, entered into an Amended and Restated Loan
Agreement pursuant to which the Company and LFC amended the original loan
agreement dated July 3, 1995 and restructured the Company's outstanding 12%
Secured Convertible Note due 2003 ("Convertible Note") held by LFC. The
restructured note dated August 14, 1998 (the "Restructured Note") has a
principal amount of $26,462,000, extended the maturity date from July 3, 2003 to
December 31, 2004, reduced the interest rate from 12% to 6% and eliminated the
convertibility feature of the Convertible Note. The Restructured Note is
collateralized by a security interest in all assets of the borrower, whether now
owned or hereafter acquired. No principal payments are due under the
Restructured Note until its maturity date. On October 9, 2002, the maturity date
of this note was extended from December 31, 2004 to December 31, 2007 and the
interest rate was increased to 9% for 2005, 10% for 2006 and 11% for 2007. The
effective interest rate for the year ended December 31, 2002 was 11.8%. In
connection with these amendments, the Company paid LFC a $250,000 fee.
As a result of the restructuring of the Convertible Note, the Restructured
Note was recorded at fair value and the approximate $7,015,000 difference
between the fair value of the Restructured Note and the carrying value of the
Convertible Note was reflected as additional paid-in capital. This difference
will be amortized as interest expense based on the expected retirement date,
December 31, 2005, using the interest method. Approximately $1,120,000,
$1,034,000 and $922,000 was amortized to interest expense during 2002, 2001 and
2000, respectively. Additional interest of $1,588,000 was expensed and paid
during each of the years in the three year period ended December 31, 2002.
In March 2001, the Company entered into a $3,000,000 line of credit
agreement with LFC. Loans outstanding under this line of credit bear interest at
10% per annum. Effective March 1, 2002, this agreement was amended to extend the
maturity to February 28, 2007, although LFC had the right to terminate the line
of credit on an annual basis. On October 9, 2002, the line of credit was
increased from $3,000,000 to $10,000,000 and LFC's ability to terminate the line
of credit prior to maturity was removed, unless the Company is in default. At
December 31, 2002 and 2001, no amounts were outstanding under this facility.
Interest on the line of credit of approximately $72,000 and $24,000 was expensed
during the years ended December 31, 2002 and 2001, respectively.
F-10
Notes payable to trust deed holders consist of non-recourse promissory
notes that mature on December 31, 2010, are non-interest bearing and are
collateralized by the San Elijo Hills project land. When a portion of the San
Elijo Hills project is sold, a specified amount is required to be paid to the
note holder in order to obtain a release of their security interest in the land.
Such amount is specified in the note agreements and takes into consideration
prior note payments. In addition, depending upon the amount of payments made to
release their security interest for prior sales, the notes may require minimum
annual payments. The minimum annual payments are currently $298,000 for annual
periods subsequent to 2003. The sum of all payments made under these notes,
whether denominated as interest, principal or otherwise, cannot exceed
approximately $42,100,000. As of December 31, 2002, $21,398,000 of payments have
been made.
The notes payable to trust deed holders were recorded at fair value at the
date of acquisition of CDS, based on the estimated future payments discounted at
6.5%. The activity for the period from date of acquisition through December 31,
2002 is as follows (in thousands):
Balance at acquisition $17,560
Principal payments (1,080)
Interest added to principal 224
-------
Balance at December 31, 2002 $16,704
=======
At the end of each reporting period, the carrying amounts of the notes are
compared to the most recent estimate of future payments. The difference is
amortized prospectively using the effective interest rate method. The effective
interest rate for the period from the date of acquisition through December 31,
2002 was 6.5%. Effective January 1, 2003, the effective interest rate was 8.8%.
Based on the Company's cash flow forecast, the expected payments to the
trust deed holders that will be allocated to principal are as follows (in
thousands): 2003 - $3,971; 2004 - $700; 2005 - $5,599; 2006 - $5,215; and 2007 -
$1,219.
6. MINORITY INTEREST
Through its ownership of CDS, the Company owns 80% of the common stock of
CDS Devco, Inc. ("Devco"), which in turns owns 85% of the common stock of San
Elijo Ranch, Inc., ("SERI"). Pursuant to a stockholders' agreement with the
holder of the minority interest in Devco, the Company is entitled to a 15%
return on all funds advanced to Devco, compounded annually, plus the return of
its capital (an aggregate of $25,767,000 as of December 31, 2002), prior to the
payment of any amounts to the minority shareholder. Once those amounts have been
paid, the minority shareholder is entitled to 20% of future cash flows, if any,
distributed to shareholders. As of December 31, 2002, no amounts have been
accrued for the Devco minority interest.
Pursuant to a stockholders' agreement with the holders of the minority
interests in SERI, Devco loans funds to SERI and charges a 12% annual rate. Once
this loan is fully repaid ($105,000 due as of December 31, 2002), the minority
shareholders of SERI are entitled to 15% of future cash flows, if any,
distributed to shareholders. As of December 31, 2002, $3,448,000 has been
accrued for the SERI minority interest. The minority shareholders of SERI are
also the holders of the notes related to the trust deeds discussed in Note 5,
above.
As of December 31, 2002 and 2001, $11,684,000 and $13,208,000,
respectively, have been accrued with respect to Leucadia's preferred capital
interest and cumulative preferred return relating to Otay Land Company, as
discussed in Note 12, below.
F-11
7. STOCK INCENTIVE PLANS
Under the Company's 1999 Stock Incentive Plan (the "Plan"), the Company may
grant options, stock appreciation rights and restricted stock to non-employee
directors, certain non-employees and employees up to a maximum grant of 300,000
shares to any individual in a given taxable year. Pursuant to the plan, each
director of the Company is automatically granted options to purchase 1,000
shares on the date on which the annual meeting of stockholders is held. The
maximum number of Common Shares which may be acquired through the exercise of
options or rights under the Plan cannot exceed, in the aggregate, 750,000; the
maximum number of Common Shares that may be awarded as restricted stock cannot
exceed, in the aggregate, 250,000. The Plan provides for the issuance of options
and rights at not less than 100% of the fair market value of the underlying
stock at the date of grant. Options generally become exercisable in five equal
instalments starting one year from the date of grant. No stock appreciation
rights have been granted. During 2000, 250,000 shares of restricted Common Stock
were issued to eligible participants, subject to certain forfeiture provisions.
In connection with this issuance of restricted stock, the Company recorded
deferred compensation of $188,000 representing the value of stock on the date of
issuance based upon market price. This amount is being amortized over the three
year vesting period of the restricted stock at which time all remaining
forfeiture provisions will end. In addition, during 2000, options to purchase an
aggregate of 25,000 shares of Common Stock were granted to non-employees at an
exercise price of $.75 per share (market price). In connection with this
issuance, the Company recorded deferred compensation of $18,000 based upon the
estimated fair value of these options at the time of grant, using the modified
Black-Scholes model. This amount is being amortized over the five year vesting
period of the options.
A summary of activity with respect to the Company's stock options for
employees and directors for 2002, 2001 and 2000 is as follows:
Common Weighted Available
Shares Average Options for Future
Subject to Exercise Exercisable Option
Option Price at Year-End Grants
---------- ---------- ------------- -----------
Balance at January 1, 2000 0 $0.00 0 725,000
======= =======
Granted 161,000 $0.75
-------
Balance at December 31, 2000 161,000 $0.75 0 564,000
====== =======
Granted 6,000 $0.93
Exercised (250) $0.70
-------
Balance at December 31, 2001 166,750 $0.75 32,250 558,000
====== =======
Granted 6,000 $0.95
Exercised (500) $0.82
-------
Balance at December 31, 2002 172,250 $0.76 65,750 552,000
======= ====== =======
The weighted-average fair value of the options granted was $.65 per share
for 2002 and $.73 per share for 2001 and 2000 as estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions: (1)
expected volatility of 95.5% for 2002, 117.7% for 2001 and 172.1% for 2000; (2)
risk-free interest rate of 3.5% for 2002, 4.8% for 2001 and 6.6% for 2000; (3)
expected lives of 4.0 years for 2002 and 2001 and 5.9 years for 2000; and (4)
dividend yield of 0% for all years.
The following table summarizes information about fixed stock options
outstanding at December 31, 2002.
Options Outstanding Options Exercisable
--------------------------------------------------- --------------------------
Common Weighted Common Weighted
Shares Weighted Average Shares Average
Range of Subject to Average Remaining Exercise Subject Exercise
Exercise Prices Option Contractual Life Price to Option Price
- --------------- --------- ---------------- -------- ---------- -------
$0.70 - $0.95 172,250 3.2 years $0.76 65,750 $0.75
F-12
In 2000, under the Company's 2000 Stock Incentive Plan (the "2000 Plan"),
the Company granted to two key employees options to purchase an aggregate of
1,000,000 shares of Common Stock at an exercise price of $.61 per share, the
then current market price per share. No additional options are available to be
granted under the 2000 Plan. The options are subject to achievement of
performance goals as determined by the Board of Directors and are exercisable
over a six year period. Options and stock issued on exercise of an option are
subject to forfeiture if the performance goals are not met within three years
from the date of grant. Deferred compensation, representing the difference
between the exercise price and the then current market price, is subject to
change based upon fluctuations in the Company's stock price. The deferred
compensation is being amortized over the expected performance period of three
years.
8. OTHER INCOME, NET
Other income, net for each of the three years in the period ended December
31, 2002, consists of the following (in thousands):
2002 2001 2000
----- ----- ----
Interest income $ 96 $ 21 $ 114
Reimbursement for fees and improvements
for previously sold property -- 678 --
Gain (loss) on sale of fixed assets 113 (5) --
Proceeds received upon the dissolution of a
partnership in excess of its recorded
investment balance 50 -- --
Other 52 5 48
---- ---- -----
Total $311 $ 699 $ 162
==== ===== =====
9. INCOME TAXES
The (provision) benefit for income taxes for each of the three years in the
period ended December 31, 2002 was as follows (in thousands):
2002 2001 2000
----- ----- -----
State income taxes - current $(471) $(172) $ 8
Federal income taxes - current 455 (495) --
Federal income taxes - deferred (363) -- --
----- ----- -----
$(379) $(667) $ 8
===== ===== =====
Current income taxes for 2002 and 2001 principally relate to federal
alternative minimum tax and state income tax. Income taxes for 2000 principally
relate to state franchise taxes.
The table below reconciles the expected statutory federal income tax to the
actual income tax (provision) benefit (in thousands):
2002 2001 2000
------ ------- ------
Expected federal income tax $3,149 $(102) $ 846
State income taxes, net of federal income
tax benefit (306) (112) 5
Federal alternative minimum tax refund
(payment) 455 (495) --
Otay Land Company taxable income
allocated to Leucadia 1,024 221 17
Increase in valuation allowance (4,701) -- (860)
Other -- (179) --
----- ----- -----
Actual income tax (provision) benefit $ (379) $(667) $ 8
====== ===== =====
F-13
The Company and its wholly-owned subsidiaries have NOLs available for
federal income tax purposes of $240,540,000 as of December 31, 2002. For state
income tax purposes, available NOLs as of December 31, 2002 total $3,569,000 and
expire in 2003 to 2014. The federal NOLs were generated during 1988 to 1999 and
expire in 2003 to 2019 as follows (in thousands):
Year of Expiration Loss Carryforwards
------------------ ------------------
2003 $ 18,698
2004 7,413
2005 --
2006 150,437
2007 8,045
Thereafter 55,947
--------
$240,540
========
A substantial majority of these NOLs are not available to reduce federal
alternative minimum taxable income, which is currently taxed at the rate of 20%.
As a result, once the Company's NOLs that are available to reduce federal
alternative minimum taxable income are either used or expire, the Company will
pay federal income tax at a rate of 20% during future periods, to the extent
these NOLs are available to reduce regular taxable income.
At December 31, 2002 and 2001 the net deferred tax asset consisted of the
following (in thousands):
2002 2001
--------- ----------
NOL carryforwards $ 84,368 $ 90,591
Land basis 14,877 911
Other, net 7,928 6,599
-------- --------
107,173 98,101
Valuation allowance (62,431) (98,101)
-------- --------
$ 44,742 $ 0
======== ========
The valuation allowance has been provided on the deferred tax asset due to
the uncertainty of future taxable income necessary for realization of the
deferred tax asset. The decrease in the valuation allowance primarily results
from the recognition of a tax benefit for the expected use of NOLs in
conjunction with the acquisition of CDS.
10. EARNINGS PER SHARE
Basic and diluted loss per share of common stock was calculated by dividing
the net loss by the weighted average shares of common stock outstanding. The
number of shares used to calculate basic and diluted loss per common share was
61,688,906, 56,807,903 and 56,762,061 for 2002, 2001 and 2000, respectively.
Options to purchase 421,354, 359,841 and 25,372 weighted average shares of
common stock outstanding during 2002, 2001 and 2000, respectively, were not
included in the computation of diluted loss per share as those options were
antidilutive.
11. COMMITMENTS AND CONTINGENCIES
Prior to its acquisition by the Company, a subsidiary of CDS entered into a
non-cancelable operating lease for its office space, a portion of which was
sublet to the Company and a portion of which was sublet to Leucadia. This lease
will expire in February 2005, subject to an option to extend for an additional
four years. In 2002, the base rent, which escalates 4% each year, was
approximately $240,000. Effective October 21, 2002, as a result of the
acquisition of CDS, the Company has recorded sublease income from Leucadia for a
monthly amount equal to Leucadia's share of the Company's cost for such space
and furniture. Such amount aggregated $21,000 for the period from October 21,
2002 to December 31, 2002. Effective January 2003, the monthly rental fee from
Leucadia was decreased to $5,500. Rental expense (net of sublease income) was
$227,000, $246,000 and $219,000 for 2002, 2001 and 2000, respectively.
F-14
In connection with the development of San Elijo Hills, CDS has provided a
letter of credit in the amount of approximately $273,000 which expires in
December 2003. The letter of credit is collateralized by a certificate of
deposit in the same amount, which is reflected in other assets.
The Company is required to obtain infrastructure improvement bonds
primarily for the benefit of the City of San Marcos prior to the beginning of
lot construction work and warranty bonds upon completion of such improvements in
the San Elijo Hills project. These bonds provide funds primarily to the City in
the event the Company is unable or unwilling to complete certain infrastructure
improvements in the San Elijo Hills project. Leucadia has obtained these bonds
on behalf of CDS, and CDS is responsible for paying all third party fees related
to obtaining the bonds. Should the City or others draw on the bonds for any
reason, one of CDS's subsidiaries would be obligated to reimburse Leucadia for
the amount drawn. As of December 31, 2002, the amount of outstanding bonds was
$30,022,000.
The Company is subject to various litigation which arises in the course of
its business. Based on discussions with counsel, management is of the opinion
that such litigation is not likely to have any material adverse effect on the
consolidated financial position of the Company, its consolidated results of
operations or liquidity.
12. OTHER RELATED PARTY TRANSACTIONS
The Company has entered into the following related party transactions with
Leucadia and LFC.
(a) Development Management Agreement. In August 1998, the Company entered
---------------------------------
into a development management agreement with an indirect subsidiary of Leucadia
that owned certain real property located in the city of San Marcos, County of
San Diego, California, to develop the San Elijo Hills project. The development
management agreement provided that the Company would act as the development
manager with responsibility for the overall management of the project, including
arranging financing for the project, coordinating marketing and sales activity,
and acting as the construction manager. The development management agreement
also provided that the Company would participate in the net profits of the
project through the payment of a success fee and fee income for field overhead,
management and marketing services based on the revenues derived from the
project. As a result of the acquisition of CDS on October 21, 2002, the Company
acquired this indirect subsidiary of Leucadia. Subsequently, the development
management agreement was amended to eliminate the success fee provisions. In
2002, 2001 and 2000, the Company recorded $1,610,000, $4,775,000 and $3,464,000,
respectively, in fee income under the development management agreement.
(b) Otay Land Company, LLC. In October 1998, the Company and Leucadia
----------------------
formed Otay Land Company to purchase approximately 4,850 acres of land, which is
part of a 22,900 acre project located south of San Diego, California, known as
Otay Ranch. Otay Land Company acquired this land for $19,500,000. The Company
has contributed $12,105,000 as capital and Leucadia has contributed $10,000,000
as a preferred capital interest. The Company is the managing member of Otay Land
Company.
All distributions by Otay Land Company shall be distributed to the Company
and Leucadia in the following order of priority: (i) to pay Leucadia an annual
minimum cumulative preferred return of 10% on all preferred capital contributed
by Leucadia; (ii) to pay Leucadia an annual cumulative preferred return of 2% on
all preferred capital provided by Leucadia, but payable only out of and to the
extent there are profits; (iii) to repay all preferred capital provided by
Leucadia; and (iv) any remaining funds are to be distributed to the Company.
During 2002, Otay Land Company made a distribution of $2,524,000 to Leucadia. At
December 31, 2002, Leucadia's preferred capital interest and cumulative
preferred return, which is reflected as minority interest in the consolidated
balance sheet, totaled $11,684,000.
(c) Administrative Services Agreement. Pursuant to administrative services
---------------------------------
agreements, LFC provides administrative services to the Company through December
31, 2003, including providing the services of one of the Company's executive
officers. Administrative fees paid to LFC in 2002, 2001 and 2000 were $120,000,
$107,000 and $255,000, respectively.
F-15
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's material financial instruments include cash and cash
equivalents, certificate of deposits, note receivable and notes payable. In all
cases, the carrying amounts of such financial instruments approximate their fair
values. In cases where quoted market prices are not available, fair values are
based on estimates using present value techniques.
14. SELECTED QUARTERLY FINANCIAL DATA (unaudited)
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ---------- -------- -------
(In thousands, except per share amounts)
2002:
- -----
Sales of real estate $ -- $ 4,285 $ -- $ 4,974
======== ======== ======== ========
Co-op marketing and advertising fees $ 470 $ 426 $ 600 $ 446
======== ======== ======== ========
Development management fee income
from San Elijo Hills $ -- $ 1,553 $ 57 $ --
======== ======== ======== ========
Income from options on real estate
properties $ 180 $ 120 $ -- $ --
======== ======== ======== ========
Cost of sales $ -- $ 809 $ -- $ 2,006
======== ======== ======== ========
Income (loss) from operations (a) $ (1,156) $ 3,750 $(12,513) $ 612
======== ======== ======== ========
Net income (loss) (a) $ (1,296) $ 3,101 $(12,342) $ (549)
======== ======== ======== ========
Basic income (loss) per share (b) $ (0.02) $ 0.05 $ (0.22) $ (0.01)
======== ======== ======== ========
Diluted income (loss) per share (b) $ (0.02) $ 0.05 $ (0.22) $ (0.01)
======== ======== ======== ========
2001:
- -----
Co-op marketing and advertising fees $ 168 $ 179 $ 122 $ 559
======== ======== ======== ========
Development management fee income
from San Elijo Hills $ -- $ 1,422 $ 1,852 $ 1,501
======== ======== ======== ========
Income from options on real estate
properties $ 180 $ 180 $ 180 $ 180
======== ======== ======== ========
Income (loss) from operations $ (1,313) $ 129 $ 516 $ 259
======== ======== ======== ========
Net income (loss) $ (1,564) $ (113) $ 11 $ 289
======== ======== ======== ========
Basic income (loss) per share $ (0.03) $ (0.00) $ 0.00 $ 0.01
======== ======== ======== ========
Diluted income (loss) per share $ (0.03) $ (0.00) $ 0.00 $ 0.01
======== ======== ======== ========
(a) During the third quarter of 2002, the Company recorded a provision of
$11,200,000 relating to environmental remediation.
(b) In 2002, the total of quarterly per share amounts does not necessarily
equal the annual per share amount.
F-16