-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WOKVSEyRcfQR4V+D0Rit4yNgzH5ZPaTfD0jrdlrXe6Gam9v5bvcptRBKW6hFzIn+ Y1dJEHogXdbDxD9XDZqRhw== 0000909518-00-000211.txt : 20000331 0000909518-00-000211.hdr.sgml : 20000331 ACCESSION NUMBER: 0000909518-00-000211 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HOMEFED CORP CENTRAL INDEX KEY: 0000833795 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 330304982 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-10153 FILM NUMBER: 583973 BUSINESS ADDRESS: STREET 1: 1903 WRIGHT PLACE STREET 2: STE 220 CITY: CARLSBAD STATE: CA ZIP: 92008 BUSINESS PHONE: 7609188200 MAIL ADDRESS: STREET 1: 1903 WRIGHT PLACE STREET 2: STE 220 CITY: CARLSBAD STATE: CA ZIP: 92008 10-K405 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [x] AMENDMENT TO ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Fee Required) For the fiscal year ended December 31, 1999 Or [_] AMENDMENT TO TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required) For the transition period from to -------------- ------------- Commission file number: 1-10153 HOMEFED CORPORATION (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 (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]. Based on the average bid and asked prices of the Registrant's Common Stock as published by the OTC Bulletin Board Service as of March 17, 2000, the aggregate market value of the Registrant's Common Stock held by non-affiliates was approximately $31,323,500 on that date. APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the Registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [x] No [_] As of March 17, 2000, there were 56,807,826 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 2000 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K. ================================================================================ NY2:\874722\09\76830.0194 PART I Item 1. Business. - ----------------- THE COMPANY Introduction HomeFed Corporation ("HomeFed" or the "Company") was incorporated in Delaware in 1988. The Company is engaged, directly and through subsidiaries, in the investment in and development of residential real estate projects in the State of California. The principal executive office of the Company is located at 1903 Wright Place, Suite 220, Carlsbad, California 92008. The Company's development projects consist of two master planned communities located in San Diego County, California: San Elijo Hills, and a portion of the larger Otay Ranch planning area. As development manager for these projects, the Company is responsible for the completion of a wide range of activities, including design engineering, grading raw land, constructing public infrastructure such as streets, utilities and public facilities, and finishing individual lots for home sites or other facilities. The Company will develop its communities in phases to allow the Company flexibility to sell finished lots to suit market conditions and to enable it to create stable and attractive neighborhoods. Consequently, at any particular time, the various phases of a project will be in different stages of land development and construction. For any master-planned community, plans must be prepared that provide for infrastructure, neighborhoods, commercial and industrial areas, educational and other institutional or public facilities as well as open space. Once preliminary plans have been prepared, numerous governmental approvals, licenses, permits and agreements, referred to as "entitlements," must be obtained before development and construction may commence, often involving a number of different governmental jurisdictions and agencies, challenges through litigation, considerable risk and expense, and substantial delays. Unless and until the requisite entitlements are received and substantial work has been commenced in reliance upon such entitlements, a developer generally does not have any "vested rights" to develop a project. In addition, as a precondition to receipt of building-related permits, master-planned communities such as San Elijo Hills typically are required in California to pay impact and capacity fees, or to otherwise satisfy mitigation requirements. Current Development Projects San Elijo Hills. In August 1998, the Company entered into a Development Management Agreement (the "Development Agreement") with San Elijo Hills Development Company, LLC, an indirect subsidiary of Leucadia National Corporation (together with its subsidiaries, "Leucadia") that owns certain real property located in the City of San Marcos, in San Diego County, California. Pursuant to the Development Agreement, this project, which is known as San Elijo Hills, will be a master-planned community of approximately 3,400 homes and 1 apartments as well as commercial properties expected to be completed during the course of the next ten years. As a result of the recertification of its environmental impact report, San Elijo Hills is fully entitled. The Company is the development manager of this project with responsibility for the overall management of the project, including, among other things, preserving existing entitlements and obtaining any additional entitlements required for the project, arranging financing for the project, coordinating marketing and sales activity, and acting as the construction manager. The Development Agreement provides that the Company will participate in the net profits of the project, and that the Company will receive fees for the field overhead, management and marketing services it is to provide, based on the revenues of the project. For additional information, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of this Report. During the first quarter of 2000, 189 residential sites in two neighborhoods were sold to builders for aggregate net consideration of $20,770,000. Three neighborhoods, consisting of 296 residential sites, are under contract for sale for aggregate consideration of $45,100,000. While the Company expects that some of these neighborhoods will close during 2000, these contracts are subject to various closing conditions and termination rights if the closing conditions are not satisfied. Therefore, no assurances can be given that any of these sales under contract will occur. Two additional neighborhoods, consisting of approximately 252 residential sites, comprise the balance of the seven neighborhoods presented for sale in 1999. An additional 6 neighborhoods, consisting of 987 residential sites, have been presented for sale during the first quarter 2000. Otay Ranch. On October 14, 1998, the Company and Leucadia formed Otay Land Company, LLC (the "Otay Land Company") for the purpose of purchasing 4,800 non-adjoining acres of land located within the larger 22,900-acre Otay Ranch master planned community south of San Diego, California. Otay Land Company acquired this land for $19,500,000. The Company has contributed $11,300,000 as capital and Leucadia has contributed $10,000,000 as a preferred capital interest; the Company will act as development manager of this project. The City of Chula Vista and the County of San Diego have approved a general development plan for the larger planning area. Although there is no minimum time within which implementation of the general development plan must be completed, it is expected that full development of the larger planning area will take decades. This general development plan establishes land use goals, objectives and policies within the larger planning area. Any development within the larger Otay Ranch master planned community must be consistent with this general development plan. The general development plan for the larger planning area contemplates home sites, a golf-oriented resort and residential community, commercial retail centers, a proposed university site and a network of infrastructure, including roads and highways, a rail transportation system, park systems and schools. Actual development of any of these will require that further entitlements and approvals be obtained. Because the larger planning area will be developed by several independent developers, in addition to the Company, an inability to coordinate with other developers could adversely affect the Company's development. Of the 4,800 acres owned by Otay Land Company, 1,200 acres are developable and 3,600 acres are zoned as various qualities of non-developable "open space mitigation land." The Company has entered into an option agreement to sell 85 acres of developable land for a sales price of $4,100,000. The Company has received a non-refundable payment of $500,000 for this option, which is scheduled to expire in December 2000, subject to extension. The Company has not yet determined whether it will develop or sell the remaining developable land and, accordingly, it does not yet know the nature or extent of the entitlements or approvals that may be necessary. Under the general development plan, approximately 1.2 acres of open space mitigation land must be set aside for each 1.0 acre of developable land. Some owners of developable land have adequate or excess mitigation land, while 2 other owners lack sufficient acreage of mitigation land. The Company expects to have substantially more mitigation land than it would need to develop its property at this project. A market for the Company's open space mitigation land exists among buyers in the San Diego County Region. The Company believes that a market for this land is likely to develop within the larger Otay Ranch development area as well. The Company continues to evaluate how best to maximize the value of this investment. The Company believes its current cash resources will be sufficient for property maintenance, management and marketing costs pending its determination of how to proceed with this project. Until the Company determines its objectives, and, if necessary, secures additional entitlements and coordinates its development activities with other developers, the Company cannot predict when, or if, any revenues will be derived from this project. Other Projects Paradise Valley. The Company owns two clustered housing development sites, which are under contract to be sold for anticipated net proceeds of $1,450,000, and a school site at the Paradise Valley project, a community located in Fairfield, California. The school site (which is subject to a purchase option held by the local school district) and clustered housing development sites have a combined book value at December 31, 1999 of $2,500,000. The Company has certain continuing obligations with respect to this project, including the obligation to construct a recreation center. Construction of this recreation center began during 1999 and is expected to cost approximately $1,200,000. Cash of $1,000,000 was deposited in an escrow account that is being drawn upon as the recreation center is being completed. At December 31, 1999, $868,000 remained in escrow. Competition Real estate development is a highly competitive business. There are numerous residential real estate developers and development projects operating in the same geographic area in which the Company operates. Competition among real estate developers and development projects is determined by the location of the real estate, the market appeal of the development master plan, and the developer's ability to build, market and deliver project segments on a timely basis. Residential developers sell to homebuilders, who compete based on location, price, market segmentation, product design and reputation. Government Regulation 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. In developing a community, the Company must obtain the approval of numerous governmental agencies regarding such matters as permitted land uses, housing density, the installation of utility services (such as water, sewer, gas, electric, telephone and cable television) and the dedication of acreage for open space, parks, schools and other community purposes. Regulations affect homebuilding by specifying, among other things, the type and quality of building material that must be used, certain aspects of land use and building design and the manner in which homebuilders may conduct their sales, operations, and overall relationships with potential home buyers. Furthermore, changes in prevailing local circumstances or applicable laws may require additional approvals, or modifications of approvals previously obtained. Timing of the initiation and completion of development projects depends upon receipt of necessary authorizations and approvals. 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. 3 Environmental Compliance 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. To date, environmental laws have not had a material adverse effect on the Company, and management is not currently aware of any environmental compliance matters that would have a material adverse effect on the Company. 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 drive potential customers to purchase competitors' products. Relationship with Leucadia; Administrative Services Agreement Since emerging from bankruptcy in 1995, administrative services and managerial support have been provided to HomeFed by a subsidiary of Leucadia. Leucadia funded HomeFed's bankruptcy plan by purchasing stock and debt of the Company. For additional information, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." In 1999, Leucadia completed the distribution of HomeFed Common Stock to shareholders of Leucadia. As a result, Joseph S. Steinberg, Chairman of the Board of HomeFed, and Ian M. Cumming, a director of HomeFed, together with their respective family members (excluding trusts for the benefit of Mr. Steinberg's children) beneficially own approximately 12.7% and 13.9%, respectively, of the outstanding Common Stock. Mr. Steinberg is also President and a director of Leucadia and Mr. Cumming is Chairman of the Board of Leucadia. At March 13, 2000, they each beneficially owned (together with their respective family members but excluding trusts for the benefit of Mr. Steinberg's children) approximately 17.9% and 16.4%, respectively, of Leucadia's outstanding common shares. Under the current administrative services agreement, which extends through February 28, 2002, Leucadia provides the services of Mr. Paul J. Borden, HomeFed's President, and Ms. Corinne A. Maki, HomeFed's Treasurer and Secretary, in addition to various administrative functions. Mr. Borden and Ms. Maki each are officers of Leucadia or its subsidiaries. The annual fee paid to Leucadia under this agreement aggregated $296,000, payable monthly, through February 29, 2000. The parties are currently negotiating the annual fee to be paid under this agreement commencing March 1, 2000. Item 2. Properties. - ------------------- The Company owns approximately 20 acres at the Paradise Valley project and approximately 4,800 non-adjoining acres at the Company's Otay Ranch project, as described under Item 1 - "Business." Land held for development and sale has an aggregate book value of $23,707,000 at December 31, 1999. The Company's corporate headquarters are located at 1903 Wright Place, Suite 220, Carlsbad California 92008 in part of an office building sub-leased from Leucadia for a monthly amount equal to its share of Leucadia's cost for such space and furnishings. The agreement pursuant to which the space and furnishings are provided extends through February 28, 2005 (coterminous with Leucadia's occupancy of the space) and provides for a monthly rental of $15,865, effective March 1, 2000. Item 3. Legal Proceedings. - -------------------------- The Company is not a party to legal proceedings other than ordinary, routine litigation, incidental to its business or not material to the Company's consolidated financial position or results of operations. 4 Item 4. Submission of Matters to a Vote of Security Holders. - ------------------------------------------------------------ The following matters were submitted to a vote at the Company's 1999 Annual Meeting of stockholders held on December 14, 1999. a) Election of Directors. Number of Shares For Withheld Patrick D. Bienvenue.............................. 42,409,438 560,538 Paul J. Borden................................... 42,703,040 266,936 Timothy M. Considine.............................. 42,702,241 267,735 Ian M. Cumming.................................... 42,702,899 267,077 Michael A. Lobatz................................. 42,408,850 561,126 Joseph S. Steinberg............................... 42,701,501 268,475 b. Approval of the Company's 1999 Stock Incentive Plan. For........................................................... 39,079,482 Against....................................................... 3,002,942 Abstentions................................................... 887,550 Broker non-votes.............................................. -- c. Ratification of PricewaterhouseCoopers LLP, as independent auditors for the year ended December 31, 1999. For........................................................... 42,792,079 Against....................................................... 88,240 Abstentions................................................... 89,656 Broker non-votes.............................................. -- Item 10..Executive Officers of the Registrant. - ---------------------------------------------- As of March 17, 2000, the executive officers of the Company, their ages, the positions held by them and the periods during which they have served in such positions are as follows: Name Age Position with HomeFed Office Held Since - ---- --- --------------------- ----------------- Paul J. Borden 51 President 1998 Corinne A. Maki 43 Secretary and Treasurer 1995 Curt R. Noland 43 Vice President 1998 The officers serve at the pleasure of the board of directors of HomeFed. The recent business experience of our executive officers is summarized as follows: Paul J. Borden. Mr. Borden has served as a director and President of HomeFed since May 1998. Mr. Borden has been a Vice President of Leucadia since August 1988, responsible for overseeing many of Leucadia's real estate investments. 5 Corinne A. Maki. Ms. Maki, a certified public accountant, has served as Treasurer of HomeFed since February 1995 and Secretary since February 1998. Prior to that, Ms. Maki served as an Assistant Secretary of HomeFed since August 1995. Ms. Maki has also been a Vice President of Leucadia Financial Corporation, a subsidiary of Leucadia, holding the offices of Controller, Assistant Secretary and Treasurer since October 1992. Ms. Maki has been employed by Leucadia since December 1991. Curt R. Noland. Mr. Noland has served as Vice President of HomeFed since October 1998. He spent the last 20 years in the land development industry in San Diego County as a design consultant, merchant builder and a master developer. From November 1997 until immediately prior to joining HomeFed, Mr. Noland was employed by the prior development manager of San Elijo Hills and served as Director of Development for San Elijo Hills. Prior to November 1997, Mr. Noland was employed for eight years by Aviara, a 1,000-acre master planned resort community in Carlsbad, California. He is also a licensed civil engineer and real estate broker. PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder - -------------------------------------------------------------------------------- Matters. - -------- The following table sets forth certain information concerning the market price of the Company's Common Stock for each quarterly period within the two most recent fiscal years. High Low ---- --- Year ended December 31, 1998 First Quarter $ .3125 $ .0625 Second Quarter .3125 .03125 Third Quarter .3125 .0100 Fourth Quarter .4375 .03125 Year ended December 31, 1999 First Quarter $ .3000 $ .03125 Second Quarter .7500 .03125 Third Quarter 1.0000 .0100 Fourth Quarter 1.0000 .1500 Year ended December 31, 2000 First Quarter (through March 17, 2000) $ .8300 $ .5200 The Company's Common Stock is traded in the over-the-counter market. The Company's Common Stock is not listed on any stock exchange, and price information for the Common Stock is not regularly quoted on any automated quotation system. The prices above are based on bid quotations, as published by the National Association of Securities Dealers OTC Bulletin Board Service, and represent interdealer prices without retail mark-up, mark-down or commission, and may not necessarily represent actual transactions. On March 17, 2000, the closing bid price for the Company's Common Stock was $.77 per share. As of this date, there were 14,047 stockholders of record. The Company did not declare dividends on its Common Stock during 1998 or 1999 and it does not anticipate that it will pay dividends for the foreseeable future. The Company's Common Stock does not currently meet the minimum requirements for listing on a national securities exchange or inclusion on the Nasdaq Stock Market. If the Company's Common Stock becomes eligible to be listed or included on the Nasdaq Stock Market, the Company will consider its alternatives with respect to the trading market for the Company's Common Stock. 6 The transfer agent for the Company's Common Stock is American Stock Transfer & Trust Company, 40 Wall Street, New York, New York 10005. Item 6. Selected Financial Data. - -------------------------------- The following selected financial data have been summarized from the Company's consolidated financial statements and are qualified in their entirety by reference to, and should be read in conjunction with, such consolidated financial statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations," contained in Item 7 of this Report. Effective September 20, 1999, Otay Land Company is included in the Company's consolidated financial statements; previously this investment had been accounted for under the equity method. Certain amounts for prior periods have been reclassified to be consistent with the 1999 presentation.
Year Ended December 31, ------------------------------------------------------------------------- 1999 1998 1997 1996 1995 --------- --------- --------- --------- --------- (In thousands, except per share amounts) SELECTED INCOME STATEMENT DATA: Sales of residential properties $ 2,600 $ 5,752 $ 4,011 $ 8,988 $ 9,422 Gross profit (loss) (36) 38 (37) (464) 426 Interest expense 2,404 2,828 2,997 3,063 1,458 Loss from operations (6,458) (4,545) (3,864) (6,424) (2,435) Reorganization items-expense -- -- -- -- (1,924) Loss before extraordinary item (7,282) (4,481) (3,577) (6,297) (4,161) Extraordinary item: Extinguishment of debt - bankruptcy -- -- -- -- 108,881 Net earnings (loss) (7,282) (4,481) (3,577) (6,297) 104,720 Per share: Basic earnings (loss) per common share: Loss before extraordinary item $ (0.22) $ (0.45) $ (0.36) $ (0.63) $ (0.42) Extraordinary item -- -- -- -- 10.89 --------- --------- --------- --------- --------- Net earnings (loss) $ (0.22) $ (0.45) $ (0.36) $ (0.63) $ 10.47 ========= ========= ========= ========= ========= Diluted earnings (loss) per common share: Loss before extraordinary item $ (0.22) $ (0.45) $ (0.36) $ (0.63) $ (0.09) Extraordinary item -- -- -- -- 3.35 --------- --------- --------- --------- --------- Net earnings (loss) $ (0.22) $ (0.45) $ (0.36) $ (0.63) $ 3.26 ========= ========= ========= ========= =========
At December 31, ---------------------------------------------------------------------- 1999 1998 1997 1996 1995 ------------ ----------- ---------- ----------- ---------- (In thousands, except per share amounts) SELECTED BALANCE SHEET DATA: Land and real estate held for development and sale $ 23,707 $ 5,008 $ 10,408 $ 14,284 $ 23,015 Total assets 27,528 19,415 16,213 17,847 27,797 Notes payable to Leucadia Financial Corporation 20,552 19,736 26,085 23,877 26,996 Other notes payable -- -- -- -- 126 Stockholders' deficit (7,107) (8,205) (10,739) (7,162) (865) Shares outstanding 56,558 10,000 10,000 10,000 10,000 Book value per common share $ (0.13) $ (0.82) $ (1.07) $ (0.72) $ (0.09)
Basic earnings (loss) per common share was calculated using 32,577,357 weighted shares outstanding for 1999 and 10,000,000 shares outstanding for 1998, 1997, 1996 and 1995. Book value per common share was calculated using 56,557,826 shares outstanding for 1999 and 10,000,000 shares outstanding for 1998, 1997, 1996 and 1995. 7 Item 7. Management's Discussion and Analysis of Financial Condition and Results - -------------------------------------------------------------------------------- of Operations. - -------------- The purpose of this section is to discuss and analyze the Company's consolidated financial condition, liquidity and capital resources and results of operations. This analysis should be read in conjunction with the consolidated financial statements and related notes which appear elsewhere in this report. Liquidity and Capital Resources For the year ended December 31, 1999, net cash was used in operating activities, principally to fund the San Elijo Hills project and Otay Ranch project. For the years ended December 31, 1998 and 1997, net cash was provided by operating activities, principally from sales of real estate. The Company's principal sources of funds are dividends or borrowings from its subsidiaries and any fee income earned from the San Elijo Hills project. The Company is dependent upon the cash flow, if any, from the sale of real estate and management fees in order to pay its expenses, including debt service payments. The Company expects that its cash on hand, together with cash generated from sales at its Paradise Valley project, will be sufficient to meet its cash flow needs for the foreseeable future. However, the Company's ability to provide services required under the Development Agreement will depend significantly upon the receipt of fees under the Development Agreement as described below. If at any time in the future the Company's cash flow is insufficient to meet its then current cash requirements, the Company could sell real estate projects held for development or seek to borrow funds. However, because all of the Company's assets are pledged to Leucadia to collateralize its $26,462,000 borrowing from Leucadia, it may be unable to obtain financing at favorable rates from sources other than Leucadia. Effective September 20, 1999, Otay Land Company has been included in the Company's consolidated financial statements. Prior to its consolidation, the Company invested $850,000 and $10,125,000 in 1999 and 1998, respectively. In July 1999 (pursuant to stock purchase agreements entered into in 1998), the Company issued an aggregate of 46,557,826 shares of Common Stock for aggregate consideration of $8,380,400, of which $6,710,300 was advanced in 1998. As a result of such issuance, the Company's outstanding Common Stock increased to 56,557,826 shares. Under the Development Agreement, the Company is responsible for the overall management of the San Elijo Hills project, including arranging financing, coordinating marketing and sales activity, and acting as construction manager. The Development Agreement provides that the Company will receive certain fees in connection with the project. These fees consist of marketing, field overhead and management service fees. These fees are based on a fixed percentage of gross revenues of the project, less certain expenses allocated to the project, and are expected to cover the Company's cost of providing services under the Development Agreement. During the first quarter of 2000, the Company received $878,000 in fees under the Development Agreement. The Development Agreement also provides for a success fee to the Company out of the project's net cash flow, if any, as described below, up to a maximum amount. Whether the success fee, if it is earned, will be paid to the Company prior to the conclusion of the project will be at the discretion of the project owner. The project owner's obligation or ability to purchase bonds providing infrastructure financing to the San Elijo Hills project could adversely affect the timing of the payment of any success fee. To determine "net cash flow" for purposes of calculating the success fee, all cash expenditures of the project will be deducted from total revenues of the project. Examples of "expenditures" for these purposes include land development costs, current period operating costs, and indebtedness, either collateralized by the project ($31,483,000 at December 31, 1999, which is non-interest bearing), or owed by the project's owner to Leucadia ($64,853,000 at December 31, 1999) (collectively, "Indebtedness"). As a success fee, the Company is entitled to receive payments out of net cash flow, if any, up to the aggregate amount of the Indebtedness. The balance of the net cash flow, if any, will be paid to the Company and the project owner in equal amounts. However, the amount of the success fee cannot be more than 68% of net cash flow minus the amount of the Indebtedness. There can be no assurance, however, that the Company will receive any success fee at all for this project. The Company believes that any success fee that it may receive will be its principal source of net income 8 earned through its participation in the San Elijo Hills project pursuant to the Development Agreement. As of December 31, 1999, the Company owed $26,462,000 principal amount to Leucadia. This amount is payable on December 31, 2004 and bears interest at 6% per year. This obligation is reflected in the consolidated balance sheet, net of debt discount, at $20,552,000 as of December 31, 1999. During the year ended December 31, 1999, the Company paid to Leucadia $1,588,000 in interest. In addition, Leucadia has invested $10,000,000 as a preferred capital interest in Otay Land Company, LLC, a consolidated subsidiary of the Company. Distributions of net income, if any, from Otay Land Company first will be paid to Leucadia until it has received an annual cumulative preferred return of 12% on, and repayment of, its preferred investment. Any remaining funds will be distributed to the Company. During 1999, the Company sold the remaining 75 residential lots and one clustered housing site at its Paradise Valley project for net proceeds of $2,487,000. In 1998, the Company sold 61 residential lots at the Paradise Valley project for net proceeds of $2,612,000. In 1999, the Company entered into a contract to sell its two remaining clustered housing sites at Paradise Valley for aggregate net proceeds of $1,450,000. This sale is expected to close during the first half of 2000. The Company has certain continuing obligations with respect to this project, including the obligation to construct a recreation center. Construction of this recreation center began during 1999 and is expected to cost $1,200,000. Cash of $1,000,000 was deposited in an escrow account that is being drawn upon as the recreation center is being completed. At December 31, 1999, $868,000 remained in escrow. In connection with an indemnity agreement to a third party surety entered into in 1990 in connection with the construction of infrastructure improvements in a development located in La Quinta, California., a subsidiary of the Company is required to maintain a minimum net worth of $5,000,000 and a minimum cash balance of $400,000. Failure to meet both of these requirements would trigger the subsidiary's obligation to provide an irrevocable letter of credit of approximately $460,000 based upon current estimates. The subsidiary currently meets the minimum cash balance requirement. As of December 31, 1999, the Company has net operating loss carryovers ("NOLs") of $275,584,000 available to reduce its future federal income tax liabilities and NOLs of $34,480,000 available to reduce its future state income tax liabilities. Most 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, the Company expects to pay federal income tax at a rate of 20% during future periods, even if these NOLs are available to reduce regular taxable income. Results of Operations Sales of residential properties decreased in 1999 as compared to 1998. In 1999, the Company sold 75 lots and one clustered housing development site at the Paradise Valley project, while in 1998, the Company sold 97 lots in the Company's Silverwood project and 61 lots at the Paradise Valley project. Sales of residential properties increased in 1998 as compared to 1997 due to the greater proportion of lot sales in 1998, with 82 lots and two finished homes sold in the Paradise Valley project in 1997. Land and real estate held for development and sale is carried at the lower of cost or fair value less costs to sell. The provision for losses for the years ended December 31, 1999, 1998 and 1997 reflect the Company's estimates to reduce the carrying value of real estate investments to fair value and, for the years ended December 31, 1999 and 1998, includes $335,000 and $119,000, respectively, for estimated additional costs to build the Paradise Valley recreational center. As a result of recording write-downs of carrying values during each of the last three years, gross profit (loss) upon sale has been insignificant. Actual cost of sales recorded during these periods reflects the level of sales activity, as well as provisions for losses. 9 Interest expense for all years presented primarily reflects the interest due on indebtedness to Leucadia, including interest of $377,000 for 1998 and $2,208,000 for 1997, which was not paid and was added to the principal balance of the obligation. Interest expense for 1999, 1998 and 1997 also reflects interest of $1,588,000, $2,162,000 and $789,000, respectively, due to Leucadia, which was paid by the Company. Interest expense also includes $ 816,000 and $ 289,000 for 1999 and 1998, respectively, for amortization of debt discount related to the indebtedness due to Leucadia. The increase in general and administrative expenses in 1999 and 1998 reflects approximately $2,504,000 and $618,000, respectively, in 1999 and 1998 of increased costs for operating expenses attributable to the San Elijo Hills project and Otay Ranch project. Income tax expense for all years presented relates to state franchise taxes. The Company has not recognized any income tax benefit for its operating losses due to the uncertainty of sufficient future taxable income which is required in order to recognize these tax benefits. Inflation The Company, as well as the real estate development and homebuilding industry in general, may be adversely affected by inflation, primarily because of either reduced rates of savings by consumers during periods of low inflation or higher land and construction costs during periods of high inflation. Low inflation could adversely affect consumer demand by limiting growth of savings for down payments, ultimately affecting demand for real estate and the Company's revenues. In addition, higher mortgage interest rates may significantly affect the affordability of permanent mortgage financing to prospective purchasers. High inflation also increases the Company's costs of labor and materials. The Company would attempt to pass through to its customers any increases in its costs through increased selling prices. To date, high or low rates of inflation have not had a material adverse effect on the Company's results of operations. However, there is no assurance that high or low rates of inflation will not have a material adverse impact on the Company's future results of operation. Interest Rates The Company's operations are interest-rate sensitive. Overall housing demand is adversely affected by increases in interest costs. If mortgage interest rates increase significantly, this may negatively impact the ability of a home buyer to secure adequate financing. This could adversely affect the Company's revenues, gross margins and profitability. Cautionary Statement for Forward-Looking Information Statements included in this Report may contain forward-looking statements. Such forward-looking statements are made pursuant to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements may relate, but are not limited, to projections of revenues, income or loss, capital expenditures, plans for growth and future operations, competition and regulation as well as assumptions relating to the foregoing. Forward-looking statements are inherently subject to risks and uncertainties, many of which cannot be predicted or quantified. When used in this Report, the words "estimates", "expects", "anticipates", "believes", "plans", "intends" and variations of such words and similar expressions are intended to identify forward-looking statements that involve risks and uncertainties. Future events and actual results could differ materially from those set forth in, contemplated by or underlying the forward-looking statements. The factors that could cause actual results to differ materially from those suggested by any such statements include, but are not limited to, those discussed or identified from time to time in the Company's public filings, including changes in general economic and market conditions, changes in domestic laws and government regulations or requirements, changes in real estate pricing environments, regional or general changes in asset valuation, demographic and economic changes in the United States generally and California in particular, increases in real estate taxes and other local government fees, significant competition from other real estate developers and homebuilders, decreased consumer spending for housing, delays in 10 construction schedules and cost overruns, availability and cost of land, materials and labor, increased development costs beyond the Company's control, damage to properties or condemnation of properties, the occurrence of significant natural disasters, the inability to insure certain risks economically, the adequacy of loss reserves, changes in prevailing interest rate levels, and changes in the composition of the Company's assets and liabilities through acquisitions or divestitures. Undue reliance should not be placed on these forward-looking statements, which are applicable only as of the date hereof. The Company undertakes no obligation to revise or update these forward-looking statements to reflect events or circumstances that arise after the date of this Report or to reflect the occurrence of unanticipated events. Item 7A. Quantitative and Qualitative Disclosure About Market Risk. - ------------------------------------------------------------------- The Company does not have material market risk exposures. 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 14(a) below. Item 9. Disagreements on Accounting and Financial Disclosure. - ------------------------------------------------------------- Not applicable. PART III Item 10. Directors and Executive Officers of the Registrant. - ------------------------------------------------------------ The information to be included under the caption "Nominees for Election as Directors" in HomeFed's definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A of the 1934 Act in connection with the 2000 annual meeting of stockholders of HomeFed (the "Proxy Statement") is incorporated herein by reference. In addition, reference is made to Item 10 in Part I of this Report. COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934 Section 16(a) of the Securities Exchange Act of 1934 requires the Company's executive officers and directors, and persons who beneficially own more than ten percent of a registered class of the Company's equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Based solely upon a review of the copies of such forms furnished to the Company and written representations from the Company's executive officers, directors and greater than 10% beneficial shareholders, the Company believes that during the year ended December 31, 1999, all persons subject to the reporting requirements of Section 16(a) filed the required reports on a timely basis. Item 11. Executive Compensation. - -------------------------------- The information to be included under the caption "Executive Compensation" in the Proxy Statement is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management. - ------------------------------------------------------------------------ The information to be included under the caption "Present Beneficial Ownership of Common Stock" in the Proxy Statement is incorporated herein by reference. 11 Item 13. Certain Relationships and Related Transactions. - -------------------------------------------------------- The information to be included under the caption "Executive Compensation - Certain Relationships and Related Transactions" in the Proxy Statement is incorporated herein by reference. 12 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. - -------------------------------------------------------------------------- (a)(1) Financial Statements Report of Independent Accountants F-1 Consolidated Balance Sheets at F-2 December 31, 1999 and 1998 Consolidated Statements of F-3 Operations for the years ended December 31, 1999, 1998 and 1997 Consolidated Statements of Changes F-4 in Stockholders' Deficit for the years ended December 31, 1999, 1998 and 1997 Consolidated Statements of Cash F-5 Flows for the years ended December 31, 1999, 1998 and 1997 Notes to Consolidated Financial Statements F-7 (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 (b) Reports on Form 8-K. None. (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. 13 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 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 report on Form 8-K dated August 14, 1998). 14 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 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 report on Form 10-Q for the quarter ended September 30, 1998). 10.15 Administrative Services Agreement, dated as of March 1, 1999, between LFC, the Company, HomeFed Resources Corporation and HomeFed Communities, Inc. (incorporated by reference to Exhibit 10.14 to the Company's report on Form 10-K for the year ended December 31, 1998). 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. 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. 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. 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). 21 Subsidiaries of the Company. 27 Financial Data Schedule. 15 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. HOMEFED CORPORATION Date: March 29, 2000 By /s/ CORINNE A. MAKI ------------------------------ Corinne A. Maki Secretary and Treasurer 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 dates indicated. Date: March 29, 2000 By /s/ JOSEPH S. STEINBERG ----------------------------------- Joseph S. Steinberg, Chairman of the Board and Director Date: March 29, 2000 By /s/ PAUL J. BORDEN ------------------------------ Paul J. Borden, President and Director (Principal Executive Officer) Date: March 29, 2000 By /s/ CORINNE A. MAKI --------------------- Corinne A. Maki Secretary and Treasurer (Principal Financial and Accounting Officer) Date: March 29, 2000 By /s/ PATRICK D. BIENVENUE -------------------------- Patrick D. Bienvenue, Director Date: March 29, 2000 By /s/ TIMOTHY CONSIDINE ----------------------- Timothy Considine, Director Date: March 29, 2000 By /s/ IAN M. CUMMING ------------------- Ian M. Cumming, Director Date: March 29, 2000 By /s/ MICHAEL A. LOBATZ ----------------------- Michael A. Lobatz, Director 16 ================================================================================ 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' deficit, and cash flows present fairly, in all material respects, the financial position of HomeFed Corporation and Subsidiaries (the "Company") as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. 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 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 the opinion expressed above. /s/ PricewaterhouseCoopers LLP March 7, 2000 Salt Lake City, Utah F-1 NY2:\888898\03\76830.0194 HOMEFED CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets December 31, 1999 and 1998 (Dollars in thousands, except par value) 1999 1998 --------- --------- ASSETS - ------ Land and real estate held for development and sale $ 23,707 $ 5,008 Cash and cash equivalents 2,795 3,120 Restricted cash 868 1,127 Investment in Otay Land Company, LLC -- 9,917 Other investments -- 79 Deposits and other assets 158 164 --------- --------- TOTAL $ 27,528 $ 19,415 ========= ========= LIABILITIES - ----------- Note payable to Leucadia Financial Corporation $ 20,552 $ 19,736 Recreation center liability 970 875 Accounts payable and accrued liabilities 1,905 299 --------- --------- Total liabilities 23,427 20,910 --------- --------- COMMITMENTS AND CONTINGENCIES - ----------------------------- MINORITY INTEREST 11,208 -- - ----------------- --------- --------- COMMON STOCK SUBSCRIPTION - ------------------------- Advance under common stock subscription -- 6,710 --------- --------- STOCKHOLDERS' DEFICIT - --------------------- Common stock, $.01 par value, 100,000,000 shares authorized; 56,557,826 and 10,000,000 shares outstanding 566 100 Additional paid-in capital 354,833 346,919 Accumulated deficit (362,506) (355,224) --------- --------- Total stockholders' deficit (7,107) (8,205) --------- --------- TOTAL $ 27,528 $ 19,415 ========= ========= 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, 1999, 1998 and 1997 (Dollars in thousands, except per share amounts)
1999 1998 1997 ------- ------- ------- Sales of residential properties $ 2,600 $ 5,752 $ 4,011 Cost of sales 2,636 5,714 4,048 ------- ------- ------- Gross profit (loss) (36) 38 (37) Provision for losses on real estate investments 365 425 153 Interest expense relating to Leucadia Financial Corporation 2,404 2,828 2,997 General and administrative expenses 3,357 1,192 597 Management fees to Leucadia Financial Corporation 296 138 80 ------- ------- ------- Loss from operations (6,458) (4,545) (3,864) Equity in losses from Otay Land Company, LLC (779) (208) -- Other income - net 259 312 319 ------- ------- ------- Loss before income taxes and minority interest (6,978) (4,441) (3,545) Income tax expense (24) (40) (32) ------- ------- ------- Loss before minority interest (7,002) (4,481) (3,577) Minority interest (280) -- -- ------- ------- ------- Net loss (7,282) $(4,481) $(3,577) ======= ======= ======= Basic loss per common share ($ 0.22) $ (0.45) $ (0.36) ======= ======= ======= Diluted loss per common share ($ 0.22) $ (0.45) $ (0.36) ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements. F-3 HOMEFED CORPORATION AND SUBSIDIARIES Consolidated Statements of Changes in Stockholders' Deficit For the years ended December 31, 1999, 1998 and 1997 (Dollars in thousands)
Common Stock Additional Total $.01 Par Paid-in Accumulated Stockholders' Value Capital Deficit Deficit ---- ---------- ----------- --------- Balance, January 1, 1997 $ 100 $ 339,904 $ (347,166) $ (7,162) Net loss (3,577) (3,577) ---- ---------- ----------- --------- Balance, December 31, 1997 100 339,904 (350,743) (10,739) Contribution of capital resulting from restructuring of note payable to Leucadia Financial Corporation 7,015 7,015 Net loss (4,481) (4,481) ------ ---------- ----------- --------- Balance, December 31, 1998 100 346,919 (355,224) (8,205) Issuance of 46,557,826 shares of Common Stock 466 7,914 8,380 Net loss (7,282) (7,282) ------ ---------- ----------- --------- Balance, December 31, 1999 $ 566 $ 354,833 $ (362,506) $ (7,107) ====== ========== =========== =========
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, 1999, 1998 and 1997 (Dollars in thousands)
1999 1998 1997 -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (7,282) $ (4,481) $ (3,577) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Provision for losses on real estate investments 365 425 153 Minority interest 280 -- -- Accrued interest added to notes payable to Leucadia Financial Corporation -- 377 2,208 Amortization of debt discount on notes payable to Leucadia Financial Corporation 816 289 -- Equity in losses from Otay Land Company, LLC 779 208 -- Changes in operating assets and liabilities: Land and real estate held for development and sale 1,912 4,591 3,723 Deposits and other assets 6 298 136 Recreation center liability 95 119 -- Accounts payable and accrued liabilities 1,546 572 (265) Decrease (increase) in restricted cash 259 (54) 12 -------- -------- -------- Net cash provided by (used in) operating activities (1,224) 2,344 2,390 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Contributions to Otay Land Company, LLC (850) (10,125) -- Decrease (increase) in other investments 79 (4) (4) -------- -------- -------- Net cash used in investing activities (771) (10,129) (4) -------- -------- --------
(continued) The accompanying notes are an integral part of these consolidated financial statements. F-5 HomeFed Corporation and Subsidiaries Consolidated Statements of Cash Flows (continued) For the years ended December 31, 1999, 1998 and 1997 (Dollars in thousands)
1999 1998 1997 ------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds received from the sale of Common Stock 1,670 -- -- Advance under Common Stock subscription from Leucadia Shareholder Trust -- 6,710 -- ------- ------- ------- Net cash provided by financing activities 1,670 6,710 -- ------- ------- ------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (325) (1,075) 2,386 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,120 4,195 1,809 ------- ------- ------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,795 $ 3,120 $ 4,195 ======= ======= ======= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest (net of amounts capitalized) $ 1,588 $ 2,162 $ 789 ======= ======= ======= Cash paid for income taxes $ 44 $ 28 $ 31 ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements. F-6 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 Communities") and HomeFed Resources Corporation. The Company is engaged, directly and through its subsidiaries, in the investment in and development of residential real estate properties in California. All significant intercompany balances and transactions have been eliminated in consolidation. During the third quarter of 1999, the limited liability agreement governing Otay Land Company was amended and as a result, the Company now has the ability to control Otay Land Company. Accordingly, effective September 20, 1999, Otay Land Company has been included in the Company's consolidated financial statements. The Company previously had accounted for this investment under the equity method of accounting; the noncash effects on the consolidated financial statements were a decrease in the investment in Otay Land Company of $9,988,000, an increase in minority interest of $10,928,000 and an increase in land and real estate held for development and sale of $20,976,000. Certain amounts for prior periods have been reclassified to be consistent with the 1999 presentation. Land and Real Estate Held for Development and Sale - Land and real estate held for development and sale is carried at the lower of cost or fair value less costs to sell. The cost of land and real estate 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. Revenue from incidental operations relating specifically to property under development is treated as a reduction of capitalized costs. Land costs included in land and real estate held for development and sale 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 and cash equivalents include short-term, highly liquid investments that are readily convertible to cash. The majority of the Company's cash and cash equivalents are held by one financial institution in Salt Lake City, Utah. Restricted Cash - Restricted cash consists of amounts held in escrow to fund the building of a recreation center at the Paradise Valley project. Revenue Recognition - Revenue from the sale of real estate is recognized at the time title is conveyed to the buyer at the close of escrow, minimum down payment requirements are met, the terms of any notes received satisfy continuing payment requirements, and there are no requirements for continuing involvement with the properties. When it is determined that the earning process is not complete, income is deferred using the installment, cost recovery or percentage of completion methods of accounting, as appropriate. Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect (i) the reported amounts of assets and liabilities, (ii) the disclosure of contingent assets and liabilities at the date of the financial statements and (iii) the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. F-7 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued: ------------------------------------------ Provisions for Losses on Real Estate Investments - Management periodically assesses the recoverability of its real estate investments by comparing the carrying amount of the investments 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. Capitalization of Interest and Real Estate Taxes - Interest and real estate taxes attributable to land and home construction are capitalized and added to the cost of those properties while the properties are being actively developed. 2. LAND AND REAL ESTATE HELD FOR DEVELOPMENT AND SALE A summary of land and real estate held for development and sale by project follows: December 31, -------------------------------- 1999 1998 ----------- ----------- Paradise Valley $ 2,522,000 $ 5,008,000 Otay Ranch 21,185,000 -- ----------- ----------- Total $23,707,000 $ 5,008,000 =========== =========== No interest was capitalized in land and real estate held for development and sale during 1999 and 1998. All land and real estate held for development and sale is property in California and is pledged as collateral under the Amended and Restated Loan Agreement. 3 NOTES PAYABLE As of August 14, 1998, the Company and Leucadia Financial Corporation ("LFC"), a subsidiary of Leucadia National Corporation ("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 approximately $26,462,000 (reflecting the original $20,000,000 principal balance of the Convertible Note, together with additions to principal resulting from accrued and unpaid interest thereon to the date of the restructuring, as allowed under the terms of the Convertible Note), extends the maturity date from July 3, 2003 to December 31, 2004, reduces the interest rate from 12% to 6% and eliminates the convertibility feature of the Convertible Note. The Restructured Note is collateralized by a perfected first priority 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. F-8 3. NOTES PAYABLE, continued: ------------- 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 over the term of the Restructured Note using the interest method. Approximately $816,000 and $289,000 was amortized to interest expense during 1999 and 1998, respectively. The carrying amount of this Restructured Note, net of debt discount, was $20,552,000 and $19,736,000 at December 31, 1999, and 1998, respectively. Interest accrued during 1998 and 1997 of $377,000, and $2,208,000, respectively, was not paid and was added to the principal balance. Additional interest of $1,588,000, $2,162,000 and $789,000 accrued during 1999, 1998 and 1997, respectively, was paid by the Company. 4. INCOME TAXES The income tax expense for all years presented principally relates to state franchise taxes. The Company has not recognized any tax benefit from its operating losses in all years presented. In 1997, the Internal Revenue Service granted the Company a favorable ruling on the Company's private letter ruling request and the Company received permission to reattribute a portion of the net operating losses from HomeFed Bank, F.S.B. ("HomeFed Bank") and its subsidiaries to the Company. The amount of net operating loss ("NOL") carryforwards reattributed was approximately $219,324,000. The Company and its wholly-owned subsidiaries have NOL carryforwards available for federal income tax purposes of $275,584,000 as of December 31, 1999, including the NOLs reattributed to the Company from HomeFed Bank and its subsidiaries. These carryforwards were generated during 1985-1999 and expire during 2000-2019. For state income tax purposes, available NOLs as of December 31, 1999 total $34,480,000 and expire in 2000-2014. At December 31, the net deferred tax asset consisted of the following: 1999 1998 ------------- ------------- NOL carryforwards $ 99,402,000 $ 95,789,000 Land basis 1,799,000 3,081,000 Other 31,000 28,000 ------------- ------------- 101,232,000 98,898,000 Valuation allowance (101,232,000) (98,898,000) ------------- ------------- $ 0 $ 0 ============= ============= The valuation allowance has been provided on the total amount of the deferred tax asset due to the uncertainty of future taxable income necessary for realization of the deferred tax asset. The valuation allowance increased by $2,334,000, $3,197,000 and $76,100,000 in 1999, 1998 and 1997, respectively. 5. PROVISION FOR LOSSES ON REAL ESTATE INVESTMENTS For the years ended December 31, 1999, 1998 and 1997, the Company recorded losses of $365,000, $425,000 and $153,000, respectively, due to the revaluation of the residential properties and the increase in estimates to build the recreation center at the Paradise Valley project. F-9 6. EARNINGS PER SHARE Basic loss per share of Common Stock for 1999 was calculated by dividing net loss by 32,577,357 weighted shares of Common Stock outstanding. Basic loss per share of Common Stock for 1998 and 1997 was calculated by dividing net loss by 10,000,000 shares of Common Stock. Diluted loss per share of Common Stock were calculated as described above. The number of shares used to calculate diluted loss per share was 32,577,357, 10,000,000 and 10,000,000 for each of the years ended December 31, 1999, 1998 and 1997, respectively. The calculation of diluted loss per share does not include Common Stock equivalents of 49,647,893 and 54,073,383 for 1998 and 1997, respectively, which are antidilutive. 7. COMMITMENTS AND CONTINGENCIES One of the Company's wholly-owned subsidiaries, HomeFed Communities, must maintain a net worth of $5,000,000 and a cash balance of $400,000 in order to ensure its ability to pay amounts which may become due under an indemnity agreement with a third-party surety which provided security for certain obligations of the partnership in which HomeFed Communities was a partner. Failure to meet both of these requirements would trigger Homefed Communities' obligation to provide an irrevocable letter of credit in the amount of 50% of the face value of the bonds issued by the surety. This letter of credit amount is currently estimated to be approximately $460,000. Homefed Communities currently meets the minimum cash balance requirement. 8. RELATED PARTY TRANSACTIONS The Company has entered into the following related party transactions with Leucadia and its subsidiary, LFC. (a) Amended Loan Agreement. As of August 14, 1998, the Company and LFC 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 outstanding Convertible Note held by LFC. The Restructured Note has a principal amount of approximately $26,462,380 (reflecting the original $20,000,000 principal balance of the Convertible Note, together with additions to principal resulting from accrued and unpaid interest thereon to the date of the restructuring, as allowed under the terms of the Convertible Note), extends the maturity date from July 3, 2003 to December 31, 2004, reduces the interest rate from 12% to 6% and eliminates the convertibility feature of the Convertible Note. Interest only on the Restructured Note is paid quarterly and all unpaid principal is due on the maturity date. During the year ended December 31, 1999, the Company paid to LFC approximately $1,588,000 in interest on the Restructured Note. 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 such amount and the carrying value of the Convertible Note was reflected as additional paid-in capital. The $7,015,000 difference between the fair value of the Restructured Note and the carrying value of the Convertible Note will be amortized over the term of the Restructured Note using the interest method. Approximately $1,105,000 has been amortized to date ($816,000 in 1999). (b) Stock Purchase Agreements. In August and October 1998, the Company entered into stock purchase agreements (the "Stock Purchase Agreements") with Leucadia, pursuant to which the Company agreed to sell an aggregate of 46,557,826 additional shares of its Common Stock to Leucadia for an aggregate purchase price of $8,380,000. In connection with the Stock Purchase Agreements, in 1998 Leucadia advanced to the Company $6,710,000 of the total purchase price. The balance of the purchase price was paid at the closing on July 8, 1999. In 1998, Leucadia assigned the Stock Purchase Agreements to the Leucadia Trust. In 1999, the Leucadia Trust distributed to its beneficial holders all of the Company's Common Stock owned by the Trust and the Trust was terminated. F-10 8. RELATED PARTY TRANSACTIONS, continued: -------------------------- (c) Development Agreement. As of August 14, 1998, the Company entered into a Development Management Agreement ("Development Agreement") with an indirect subsidiary of Leucadia that owns certain real property located in the City of San Marcos, County of San Diego, California, to develop a master-planned residential project on such property. The project, known as San Elijo Hills, is intended to be developed into a community of approximately 3,400 homes over the next ten years. The Development Agreement provides that the Company will act as the development manager with responsibility for the overall management of the project, including arranging financing for the project, marketing and sales activity, and acting as the construction manager. The Development Agreement provides for the Company to receive a profit participation (as determined in accordance with the Development Agreement), and fee income for project management and marketing services based on the revenues derived from the project. (d) Otay Land Company, LLC. As of October 14, 1998, the Company and Leucadia formed Otay Land Company. The Company has contributed $11,300,000 as capital and Leucadia has contributed $10,000,000 as a preferred capital interest. The Company is the manager of Otay Land Company. Otay Land Company has acquired, for approximately $19,500,000, approximately 4,800 acres of land which is part of a 22,900-acre project located south of San Diego, California, known as Otay Ranch. 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. (e) Administrative Services Agreement. Pursuant to administrative services agreements, LFC provides administrative services to the Company, including providing the services of two of the Company's three executive officers. Administrative fees paid to LFC in 1999, 1998 and 1997 were $296,000, $138,000, and $80,000, respectively. Effective March 1, 1999, the Company and LFC entered into a new three year administrative services agreement pursuant to which the Company will pay LFC an administrative fee of $296,101 for the first annual period, with the fee for subsequent annual periods to be negotiated. The parties are currently negotiating the fee for the annual period beginning March 1, 2000. The Company's corporate headquarters is located at 1903 Wright Place, Suite 220, Carlsbad, California in part of an office building sub-leased from a subsidiary of Leucadia for a monthly amount equal to its share of the Leucadia subsidiary's cost for such space and furnishings. The agreement pursuant to which the space and furnishings are provided extends through February 28, 2005 (coterminous with Leucadia's occupancy of the space) and provides for a monthly rental of $15,865 effective March 1, 2000. 9. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's material financial instruments include cash and cash equivalents, restricted cash, investments and notes payable. In all cases, the carrying amount of such financial instruments approximates their fair values. In cases where quoted market prices are not available, fair values are based on estimates using present value techniques. F-11 10. STOCK OPTIONS, STOCK APPRECIATION RIGHTS AND RESTRICTED STOCK Under the HomeFed Corporation 1999 Stock Incentive Plan, the Company may grant stock options, stock appreciation rights and restricted shares of the Company's stock to directors, certain of its officers and key employees and certain officers and key employees of any subsidiary corporation, parent corporation or affiliated corporation (as defined in the Plan) of the Company. The Plan provides that up to one million shares of Common Stock may be acquired pursuant to the exercise of options or rights or issued as restricted stock. The exercise price of any incentive stock option issued under the Plan is required to be not less than the fair market value per share at the date the option is granted. Options may be granted from time to time at the discretion of the Board of Directors and will vest over periods of one to five years from the grant date. The aggregate number of shares with respect to which options, rights or shares of restricted stock may be granted under the Plan to any grantee in any one taxable year is 300,000. No stock options, appreciation rights or shares of restricted stock were granted in 1999. On March 8, 2000 options to purchase an aggregate of 150,000 shares of Common Stock were granted to eligible participants under the Plan at an exercise price of $.75 per share and an aggregate of 250,000 shares of restricted stock were issued to eligible participants under the Plan. F-12 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. 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). E-1 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 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 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 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 report on Form 10-Q for the quarter ended September 30, 1998). 10.15 Administrative Services Agreement, dated as of March 1, 1999, between LFC, the Company, HomeFed Resources Corporation and HomeFed Communities, Inc. (incorporated by reference to Exhibit 10.14 to the Company's report on Form 10-K for the year ended December 31, 1998). 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. 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. 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. 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). 21 Subsidiaries of the Company. 27 Financial Data Schedule.
E-2 EX-3.2 2 EXHIBIT 3.2 ----------- AMENDED AND RESTATED BYLAWS OF HOMEFED CORPORATION ARTICLE I STOCKHOLDERS Section 1. Place of Meetings. All annual and special meetings of stockholders shall be held at such places within or without the State of Delaware as may from time to time be designated by the board of directors and specified in the notice of meeting. Section 2. Annual Meeting. A meeting of the stockholders of the corporation for the election of directors and for the transaction of any other business of the corporation as may properly come before the meeting shall be held annually at such date and time as the board of directors shall determine. Section 3. Special Meetings. Special meetings of the stockholders shall be called only by a majority of the board of directors. Section 4. Notice of Meetings. Written notice stating the place, day and hour of each meeting and the general purpose or purposes for which such meeting is called shall be delivered not less than ten nor more than sixty days before the date of such meeting, either personally or by mail to each stockholder of record entitled to vote at such meeting. Section 5. Fixing Date for Determination of Stockholders of Record. (a) In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the board of directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the board of directors and which record date shall not be more than 60 nor less than 10 days before the date of such meeting. If no record date is fixed by the board of directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on that day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the board of directors may fix a new record date for the adjourned meeting. (b) In order that the corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the board of directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the board of directors and which date shall not be more than 10 days after the date upon which the resolution fixing the record date is adopted by the board of directors. If no record date has been fixed by the board of directors, the record date for determining stockholders entitled to consent to corporate action in writing without a 76830.0194 meeting, when no prior action by the board of directors is required, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the corporation by delivery to its registered office in Delaware, its principal place of business, or an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the board of directors and prior action by the board of directors is required by the General Corporation Law of the State of Delaware, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the day on which the board of directors adopts the resolution taking such prior action. (c) In order that the corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the board of directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted and which record date shall be not more than 60 days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the board of directors adopts the resolution relating thereto. Section 6. Voting Lists. The officer or agent having charge of the stock transfer books for shares of the stock of the corporation shall make, at least ten days before each meeting of the stockholders, a complete list arranged in alphabetical order of the stockholders entitled to vote at such meeting, or any adjournment thereof. Such list shall include the address of and the number of shares held by each stockholder, and shall be subject to inspection by any stockholder at any time during usual business hours for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified in the notice of the meeting, at the place where the meeting is to be held. Such list shall also be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any stockholder during the whole time of the meeting. The original stock transfer books shall be the only prima facie evidence as to who are the stockholders entitled to examine such list or transfer books or to vote at any meeting of stockholders. Section 7. Quorum. Except as otherwise provided by law or the corporation's Restated Certificate of Incorporation, a quorum for the transaction of business at any meeting of stockholders shall consist of the holders of record of a majority of the issued and outstanding shares of the capital stock of the corporation entitled to vote at the meeting, present in person or by proxy. If there be no such quorum, the holders of a majority of such shares so present or represented may adjourn the meeting from time to time, without further notice, until a quorum shall have been obtained. When a quorum is once present it is not broken by the subsequent withdrawal of any stockholder. 2 Section 8. Organization. Meetings of stockholders shall be presided over by the chairman of the board, if any, or if none or in the chairman's absence, the president, if any, or if none or in the president's absence, a vice-president, if any, or if none or in the absence of a vice-president, by a chairman to be chosen by the board of directors. The secretary of the corporation, or in the secretary's absence an assistant secretary, shall act as secretary of every meeting, but if neither the secretary nor an assistant secretary is present, the presiding officer of the meeting shall appoint any person present to act as secretary of the meeting. Section 9. Voting; Proxies; Required Vote. (a) At each meeting of stockholders, every stockholder shall be entitled to vote in person or by proxy appointed by instrument in writing, subscribed by such stockholder or by such stockholder's duly authorized attorney-in-fact (but no such proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period), and, unless the Restated Certificate of Incorporation provides otherwise, shall have one vote for each share of stock entitled to vote registered in the name of such stockholder on the books of the corporation on the applicable record date fixed pursuant to these Bylaws. At all elections of directors the voting may but need not be by ballot and a plurality of the votes cast there shall elect. Except as otherwise required by law or the Restated Certificate of Incorporation, any other action shall be authorized by a majority of the votes cast. (b) Any action required or permitted to be taken at any meeting of stockholders may, except as otherwise required by law or the Restated Certificate of Incorporation, be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of record of the issued and outstanding capital stock of the corporation having a majority of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted, and the writing or writings are filed with the permanent records of the corporation. Prompt notice of the taking of corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. Section 10. Inspectors of Election. In advance of any meeting of stockholders, the board of directors may appoint one or more persons, other than nominees for office, as inspectors of election to act at such meeting or any adjournment thereof. If the board of directors so appoints one or more such inspectors, that appointment shall not be altered at the meeting. If inspectors of election are not so appointed, the chairman of the board or the president shall make such appointment at the meeting. In case any person appointed as inspector fails to appear or fails or refuses to act, the vacancy may be filled by appointment by the board of directors in advance of the meeting or at the meeting by the chairman of the board or the president. Each inspector, if any, before entering upon the discharge of his or her duties, shall take and sign an oath faithfully to execute the duties of inspector at such meeting with strict impartiality and according to the best of his ability. The duties of such inspector shall 3 include: determining the number of shares of stock outstanding and the voting power of each share, the shares of stock represented at the meeting, the existence of a quorum, and the authenticity, validity and effect of proxies; receiving votes, ballots or consents; hearing and determining all challenges and questions in any way arising in connection with the right to vote; counting and tabulating all votes or consents; determining the result; and such acts as may be proper to conduct the election or vote with fairness to all stockholders. Section 11. Advance Notice. In order to properly submit any business to an annual meeting of stockholders, a stockholder must give timely notice in writing to the Secretary of the Corporation of such stockholder's intention to present such business. To be considered timely, a stockholder's notice must be delivered, either in person or by United States certified mail, postage prepaid, and received at the principal executive office of the Corporation, not less than one hundred twenty (120) days prior to the first anniversary date of the Corporation's proxy statement in connection with the last Annual Meeting or if no Annual Meeting was held in the previous year, not less than a reasonable time, as determined by the Board of Directors, prior to the date of the applicable Annual Meeting. Each notice to the Secretary shall set forth (i) the name and address of the stockholder and his or her nominees, (ii) a representation that the stockholder is entitled to vote at such meeting, indicating the number of shares owned of record and beneficially by such stockholder, together with a statement that such stockholder intends to appear in person or by proxy at the meeting to present such proposal or proposals, (iii) a description of the proposal or proposals to be presented, including the complete text of any resolutions to be presented at the meeting and the reasons for conducting such business at the meeting and (iv) any material interest of the stockholder in the business to be submitted at the meeting. In addition, the stockholder shall promptly provide any other information reasonably requested by the Corporation. The presiding officer of the meeting may, if the facts warrant, determine that a proposal was not made in accordance with the foregoing procedure, and if he should so determine, he shall so declare to the meeting and the defective proposal shall be disregarded. Notwithstanding the foregoing provisions of this Section 11, a stockholder who seeks to have any proposal included in the Corporation's proxy statement shall comply with applicable state law and the requirements of the rules and regulations promulgated by the Securities and Exchange Commission. ARTICLE II BOARD OF DIRECTORS Section 1. General Powers. The business and affairs of the corporation shall be managed by or under the direction of its board of directors. 4 Section 2. Qualification; Number; Term; Remuneration. (a) Each director shall be at least 18 years of age. A director need not be a stockholder, a citizen of the United States, or a resident of the State of Delaware. The number of directors constituting the entire board shall be three (3), or such larger number up to seven (7) as may be fixed from time to time by action of the stockholders or board of directors, one of whom may be selected by the board of directors to be its chairman. The use of the phrase "entire board" herein refers to the total number of directors which the corporation would have if there were no vacancies. (b) Directors who are elected at an annual meeting of stockholders, and directors who are elected in the interim to fill vacancies and newly created directorships, shall hold office until the next annual meeting of stockholders and until their successors are elected and qualified or until their earlier resignation or removal. (c) Directors may be paid their expenses, if any, of attendance at each meeting of the board of directors and may be paid a fixed sum for attendance at each meeting of the board of directors or a stated salary as director. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. Section 3. Annual Meeting. Following the annual meeting of stockholders, the newly elected board of directors shall meet for the purpose of the election of officers and the transaction of such other business as may properly come before the meeting. Such meeting may be held without notice immediately after the annual meeting of stockholders at the same place at which such stockholders' meeting is held. Section 4. Regular Meetings. Regular meetings of the board of directors shall be held at such times and at such places within or without the State of Delaware as the board of directors shall fix by resolution. No notice shall be required for regular meetings for which the time and place has been fixed by resolution. Section 5. Special Meetings. Special meetings of the board of directors may be called by or at the request of the chairman of the board, the president or one-third of the directors. The persons authorized to call special meetings of the board of directors may fix any place as the place for holding any special meeting of the board of directors called by such persons. Section 6. Telephonic Meetings. Members of the board of directors may participate in meetings by means of conference telephone or similar communications equipment by which all persons participating in the meeting can hear each other. Such participation shall constitute presence in person but shall not constitute attendance for the purpose of compensation pursuant to Section 2(c) of this Article. 5 Section 7. Notice of Meetings. A notice of the place, date and time and the purpose or purposes of each meeting of the board of directors shall be given to each director by mailing the same at least two days before the meeting, or by telegraphing or telephoning the same or by delivering the same personally not later than the day before the day of the meeting. Section 8. Quorum. Except as otherwise provided by law, a majority of the entire board shall constitute a quorum. A majority of the directors present, whether a quorum is present, may adjourn a meeting from time to time to another time and place without notice. Section 9. Manner of Acting. The act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the board of directors. Section 10. Action Without a Meeting. Any action required or permitted to be taken by the board of directors at a meeting may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the directors, and the writing is filed with the minutes of proceedings of the board of directors. Section 11. Resignation. Any director may resign at any time by sending a written notice of such resignation to the corporation addressed to the chairman of the board or the president. Unless otherwise specified therein, such resignation shall take effect upon receipt thereof by the chairman of the board or the president. Section 12. Newly Created Directorships and Vacancies. Any vacancies on the board of directors resulting from death, resignation, retirement, disqualification, removal from office or other cause may be filled by the affirmative vote of a majority of directors then in office, although less than a quorum, or by the sole remaining director, or, in the event of the failure of the directors or the sole remaining director so to act, by the stockholders at the next annual meeting which occurs after the expiration of a 90-day period commencing on the day the vacancy is created. Directors so chosen shall hold office for a term expiring at the next annual meeting of stockholders. A director elected to fill a vacancy by reason of an increase in the number of directorships may be elected by a majority vote of the directors then in office, although less than a quorum of the board of directors, to serve until the next annual meeting of stockholders. No decrease in the number of directors constituting the board of directors shall shorten the term of any incumbent director. Section 13. Organization. At all meetings of the board of directors, the chairman of the board, if any, or if none or in the chairman's absence or inability to act the president, or in the president's absence or inability to act any vice-president who is a member of the board of directors, or in such vice-president's absence or inability to act a chairman chosen by the directors, shall preside. The secretary of the corporation shall act as secretary at all meetings of the board of directors when present, and, in the secretary's absence, the presiding officer may appoint any person to act as secretary. 6 ARTICLE III COMMITTEES OF THE BOARD Section 1. Membership and Authorities. The board of directors may, by resolution adopted by the affirmative vote of a majority of the full board, designate one or more directors to constitute an Executive Committee or such other committees as the board of directors may determine, each of which committees to the extent provided in such resolution or resolutions or in these Bylaws shall have and may exercise all the powers of the board of directors in the management of the business and affairs of the corporation, except in those cases where the authority of the board of directors is specifically denied to the Executive Committee or such other committee or committees by law or these Bylaws. Section 2. Conduct of Business. Each committee may determine the procedural rules for meeting and conducting its business and shall act in accordance therewith, except as otherwise provided herein or required by law. Adequate provision shall be made for notice to members of all meetings; a majority of the members shall constitute a quorum unless the committee shall consist of one or two members, in which event one member shall constitute a quorum; and in each case where a quorum is present, all matters shall be determined by a majority vote of the members present. Section 3. Minutes of Meetings. Each committee designated by the board of directors shall keep regular minutes of its proceedings and report the same to the board of directors when required. Section 4. Vacancies. Unless otherwise restricted by law, the board of directors may designate one or more of its members as alternate members of any committee who may replace any absent or disqualified member at any meeting of such committee. The board of directors shall have the power at any time to fill vacancies in, to change the membership of and to dissolve any committee. Section 5. Telephonic Meetings. Members of any committee designated by the board of directors may participate in a meeting of such committee by means of conference telephone or similar communications equipment by which all persons participating in the meeting can hear each other. Such participation shall constitute presence in person but shall not constitute attendance for the purpose of compensation pursuant to Section 2(c) of this Article. Section 6. Action Without Meeting. Unless otherwise restricted by law or these Bylaws, any action required or permitted to be taken at any meeting of any committee designated by the board of directors may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the members of the committee. 7 ARTICLE IV OFFICERS Section 1. Positions. The officers of the corporation shall be a president, one or more vice presidents, a secretary and a treasurer, each of whom shall be elected by the board of directors. The board of directors may also designate the chairman of the board as an officer. The president shall be the chief executive officer unless the board of directors designates the chairman of the board as chief executive officer. The offices of the secretary and treasurer may be held by the same person, and a vice president may also be either the secretary or the treasurer. The board of directors may designate one or more vice presidents as executive vice president, first vice president or senior vice president. The board of directors may also elect, or authorize the appointment of, such other officers as the business of the corporation may require. The officers shall have such authority and perform such duties as are described in these Bylaws and/or as the board of directors may from time to time authorize or determine. In the absence of action by the board of directors, the officers shall also have such powers and duties as generally pertain to their respective offices. Section 2. Chairman of the Board. The chairman of the board of directors, if there be one, shall preside at all meetings of the board of directors and shall have such other powers and duties as may from time to time be assigned by the board of directors. Section 3. President and Chief Executive Officer. The president shall be the chief executive officer of the corporation (unless the chairman of the board, if any, has been so designated by the board of directors), and shall have such duties as customarily pertain to that office. The president shall have general management and supervision of the property, business and affairs of the corporation and over its other officers; may appoint and remove assistant officers and other agents and employees, other than officers referred to in Section 1 of this Article; and may execute and deliver in the name of the corporation powers of attorney, contracts, bonds and other obligations and instruments. Section 4. Vice-President. A vice-president may execute and deliver in the name of the corporation contracts and other obligations and instruments pertaining to the regular course of the duties of said office, and shall have such other authority as from time to time may be assigned by the board of directors or the president. Section 5. Treasurer. The treasurer shall in general have all duties incident to the position of treasurer and such other duties as may be assigned by the board of directors or the president. Section 6. Secretary. The secretary shall in general have all the duties incident to the office of secretary and such other duties as may be assigned by the board of directors or the president. Section 7. Assistant Officers. Any assistant officer shall have such powers and duties of the officer such assistant officer assists as such officer or the board of directors shall from time to time prescribe. 8 Section 8. Election and Term of Office. The officers of the corporation shall be elected annually at the first meeting of the directors held after each annual meeting of the stockholders. If the election of officers is not held at such meeting, such election shall be held as soon thereafter as possible. Each officer shall hold office until his successor shall have been duly elected and qualified or until his death, resignation or removal in the manner hereinafter provided. Election or appointment of an officer, employee or agent shall not by itself create any contractual rights to employment. The board of directors may authorize the corporation to enter into an employment contract with any officer, but no such contract shall impair the right of the board of directors to remove any officer at any time in accordance with Section 7 of this Article IV. Section 9. Removal. Any officer may be removed by the board of directors whenever in its judgment the best interests of the corporation will be served thereby, but such removal, other than for cause, shall be without prejudice to the contract rights, if any, of the person so removed. Section 10. Vacancies. A vacancy in any office because of death, resignation, removal, disqualification or otherwise, may be filled by a majority vote of the board of directors for the unexpired portion of the term. Section 11. Remuneration. The remuneration of the officers shall be fixed from time to time by the board of directors. ARTICLE V CONTRACTS, CHECKS AND DEPOSITS Section 1. Contracts. To the extent permitted by applicable law, the Restated Certificate of Incorporation or these Bylaws, the board of directors may authorize any officer, employee or agent of the corporation to enter into any contract or execute and deliver any instrument in the name of, and on behalf of, the corporation. Such authority may be general or confined to specific instances. Section 2. Checks, Drafts, Etc. All checks, drafts or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the corporation shall be signed by one or more officers, employees or agents of the corporation in such manner as shall from time to time be determined by the board of directors. Section 3. Deposits. All funds of the corporation not otherwise employed shall be deposited from time to time to the credit of the corporation in any duly authorized depositories as the board of directors may select. ARTICLE VI BOOKS AND RECORDS Section 1. Location. The books and records of the corporation may be kept at such place or places within or outside the State of Delaware as the board of directors or the 9 respective officers in charge thereof may from time to time determine. The record books containing the names and addresses of all stockholders, the number and class of shares of stock held by each and the dates when they respectively became the owners of record thereof shall be kept by the secretary as prescribed in the Bylaws and by such officer or agent as shall be designated by the board of directors. Section 2. Addresses of Stockholders. Notices of meetings and all other corporate notices may be delivered personally or mailed to each stockholder at the stockholder's address as it appears on the records of the corporation. ARTICLE VII CERTIFICATES FOR SHARES AND THEIR TRANSFER Section 1. Certificates for Shares. Subject to the terms of this Section 1, certificates representing shares of stock of the corporation shall be in such form as shall be determined by the board of directors. So long as the restrictions set forth in Part B of Article 4 of the Restated Certificate of Incorporation shall not have lapsed, all share certificates representing shares of capital stock of the corporation shall bear a conspicuous legend as follows: "THE TRANSFER OF THE SECURITIES REPRESENTED HEREBY IS SUBJECT TO RESTRICTIONS PURSUANT TO PART B OF ARTICLE 4 OF THE RESTATED CERTIFICATE OF INCORPORATION OF HOMEFED CORPORATION REPRINTED IN ITS ENTIRETY ON THE BACK OF THIS CERTIFICATE." Certificates representing shares of stock of the corporation shall be signed by the chairman of the board of directors or the president or vice president, and by the treasurer or an assistant treasurer or the secretary or an assistant secretary, and shall be sealed with the corporate seal or a facsimile thereof. The signatures of such officers upon a certificate may be facsimiles if the certificate is manually signed on behalf of a transfer agent or a registrar other than the corporation itself or one of its employees. In the event that one of the officers signing the certificates ceases to hold his position with the corporation, the certificates may nevertheless be used as if he were still in office. Each certificate for shares of stock shall be consecutively numbered or otherwise identified. The name and address of the person to whom the shares are issued, with the number of shares and date of issue, shall be entered in the stock transfer books of the corporation. All certificates surrendered to the corporation for transfer shall be cancelled, and no new certificate shall be issued until the former certificate for a like number of shares shall have been surrendered and cancelled, except that in the case of a lost, stolen or destroyed certificate, a new certificate may be issued therefor upon such terms and indemnity to the corporation as the board of directors may prescribe. Section 2. Transfer of Shares. Subject to the restrictions on transfer provided in the Restated Certificate of Incorporation, a transfer of shares of stock of the corporation shall 10 be made only on its stock transfer books, and authority for such transfer shall be given only by the holder of record thereof or by his legal representative, who shall furnish proper evidence of such authority, or by his attorney thereunto duly authorized by power of attorney duly executed and filed with the corporation. Such transfer shall be made only on surrender for cancellation of the certificate for such shares. The person in whose name shares of stock stand on the books of the corporation shall be deemed by the corporation to be the owner thereof for all purposes. Notwithstanding the foregoing, any transfer of shares of stock of the corporation shall be subject to the transfer restrictions contained in the Restated Certificate of Incorporation. ARTICLE VIII FISCAL YEAR, ANNUAL AUDIT The fiscal year of the corporation shall end on the thirty-first day of December of each year. The corporation shall be subject to an annual audit as of the end of its fiscal year by independent public accountants appointed by, and responsible to, the board of directors. The appointment of such accountants shall be subject to annual ratification by the stockholders. ARTICLE IX DIVIDENDS Subject to applicable law, the Restated Certificate of Incorporation and these Bylaws, the board of directors may, from time to time, declare, and the corporation may pay, dividends on the outstanding shares of stock of the corporation. ARTICLE X CORPORATE SEAL The corporate seal of the corporation shall be in such form as the board of directors shall prescribe. ARTICLE XI AMENDMENTS These Bylaws may be adopted, amended or repealed by the affirmative vote of the holders of at least two-thirds of the total votes eligible to be cast at a legal meeting of the stockholders or by a resolution adopted by a majority of the directors then in office. 11 EX-10.17 3 EXHIBIT 10.17 ------------- OPTION AND PURCHASE AGREEMENT AND ESCROW INSTRUCTIONS BY AND BETWEEN OTAY LAND COMPANY, LLC ("Owner") and LAKES KEAN ARGOVITZ RESORTS-CALIFORNIA, LLC ("Optionee") NY2:\890364\01\76830.0194 OPTION AND PURCHASE AGREEMENT AND ESCROW INSTRUCTIONS This OPTION AND PURCHASE AGREEMENT AND ESCROW INSTRUCTIONS ("Agreement") is made and effective as of October 15, 1999 ("Effective Date"), by and between OTAY LAND COMPANY, LLC, a Delaware limited liability company ("Owner"), and LAKES KEAN ARGOVITZ RESORTS-CALIFORNIA, LLC, a Delaware limited liability company, ("Optionee"), with reference to the facts set forth below. RECITALS A. Owner owns certain real property containing approximately eighty-six (86) acres located in the County of San Diego, State of California, more particularly described in Exhibit "A" attached hereto and incorporated herein ("Property"). B. Optionee desires to enter into this Agreement to obtain an option to purchase the Property from Owner on the terms and conditions set forth below. Owner has agreed to grant to Optionee an option to purchase the Property on the terms and conditions set forth below. Owner and Optionee acknowledge and agree that the following facts are true and correct: (a) the amount of the Option Payments (as defined below) has been specifically negotiated by the parties in view of all relevant facts and circumstances existing on the Effective Date, (b) the amount of the Option Payments will not put Optionee under economic compulsion to exercise the Option (as defined below), and (c) this Agreement exposes Owner to the risk of changes in market conditions if Optionee does not elect to exercise the Option and Owner is required to remarket the Property. NOW, THEREFORE, in consideration of the recitals set forth above, the mutual agreements set forth herein and for other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as set forth below. Article 1 DEFINED TERMS Unless the context otherwise provides, the following terms have the meanings set forth below. 1.1 Agreement. The term "Agreement" means this Option and Purchase Agreement and Escrow Instructions executed between Owner and Optionee. 1.2 ALTA Standard Title Policy and ALTA Extended Title Policy. The term "ALTA Standard Title Policy" means the American Land Title Association ("ALTA") owner's policy of title insurance with western regional exceptions (ALTA Standard) (or its CLTA equivalent) to be issued by the Title Company (as defined below) upon the Close of Escrow pursuant to the terms of this Agreement. The term "ALTA Extended Title Policy" means the ALTA owner's additional coverage policy of title insurance, Form B, which Optionee may request in lieu of the ALTA Standard Title Policy in accordance with the provisions of Section 4.2.2 of this Agreement. 1.3 Business Day. The term "Business Day" means any day other than a Saturday or Sunday or legal holiday in the State of California. 1.4 Cash. The term "Cash" means (i) currency of the United States of America, (ii) cashier's check(s) currently dated and payable to Escrow Agent or Owner, as required under this Agreement, drawn and paid through a California banking institution, tendered to Escrow Agent or Owner, as required under this Agreement at least one additional Business Day before funds are required to be available in Escrow or (iii) an amount credited by wire transfer into Escrow Agent's or Owner's bank account as required under this Agreement. 1.5 Close of Escrow. The term "Close of Escrow" means the consummation of the purchase of the Property by Optionee from Owner and the recordation of Owner's Grant Deed (as defined below) in accordance with the terms and provisions of this Agreement. 1.6 Closing Date. The term "Closing Date" means the date on which the closing will be held as described in Section 3.2 of this Agreement. 1.7 Districts. The term "Districts" shall have the meaning set forth in Section 5.7 below. 1.8 Effective Date. The term "Effective Date" means the date in the first paragraph of this Agreement. 1.9 Environmental Laws. The term "Environmental Laws" means any federal, state or local laws, ordinances, codes, statutes, regulations, administrative rules, policies and orders, and other authority, existing on the Effective Date, which classify, regulate, list or define Hazardous Materials. 1.10 Escrow. The term "Escrow" means the escrow to be opened by Escrow Agent pursuant to the terms of this Agreement. 1.11 Escrow Agent. The term "Escrow Agent" means Chicago Title Company, 925 "B" Street, San Diego, California 92101. 1.12 Feasibility Period. The term "Feasibility Period" means the period beginning on October 15, 1999, and ending on December 15, 1999, during which time Optionee shall have the right to conduct its investigations and studies of the Property in accordance with Section 4.1 below. 2 1.13 Governmental Action. The term "Governmental Action" means (a) any order of a court of competent jurisdiction, and/or (b) any enactment of any Governmental Agencies (as defined below) by the initiative/referendum process or otherwise, affecting the Property either directly or indirectly including, but not limited to: limitation on the number of building, grading or other permits that can be issued during any given time period or imposition of obligations or conditions in connection with the issuance of such permits, declaration of policy, resolution, ordinance, statute, regulation, the enforcement of any condition or agreement between Owner and any Governmental Agency or any other enactment of any Governmental Agency and irrespective of whether the orders or enactments listed immediately above contain the words "moratorium", "moratoria" or similar words. 1.14 Governmental Agencies. The term "Governmental Agencies" means any local, city, county, state and/or federal governmental or quasi-governmental agencies, authorities or regulatory bodies, administrative agencies, community facilities districts or other Districts, and any public or private utility companies having jurisdiction over the Property. 1.15 Governmental Approvals. The term "Governmental Approvals" means all agreements, entitlements, permits, licenses and other approvals that may be required with respect to the Property. 1.16 Hazardous Materials. The term "Hazardous Materials" shall mean any toxic or hazardous substance, material or waste or any pollutant or contaminant or infectious or radioactive material which as of the Effective Date is regulated under any Environmental Laws. 1.17 Notice of Approval. The term "Notice of Approval" means the notice to be delivered to Owner if Optionee approves of its feasibility studies during the Feasibility Period. 1.18 Notice of Disapproval. The term "Notice of Disapproval" means the notice to be delivered to Owner if Optionee disapproves of its feasibility studies during the Feasibility Period. 1.19 Option. The term "Option" shall mean the option to purchase the Property granted by Owner to Optionee pursuant to this Agreement. 1.20 Option Expiration Date. The term "Option Expiration Date" means December 15, 2000, subject to extension as provided in Section 2.3.1, upon which the Option shall terminate unless previously exercised in accordance with this Agreement. 1.21 Option Payments. The term "Option Payments" means collectively the First Option Payment (as hereinafter defined) and the Second Option Payment (as hereinafter defined), as set forth in Section 2.2. 3 1.22 Optionee. The term "Optionee" means LAKES KEAN ARGOVITZ RESORTS-CALIFORNIA, LLC, a Delaware limited liability company, or any assignee permitted under Section 11.1 below. 1.23 Optionee's Agents. The term "Optionee's Agents" means the agents, representatives, officers, employees, contractors and licensees of Optionee and their successors and assigns. 1.24 Owner. The term "Owner" means Otay Land Company, LLC, a Delaware limited liability company. 1.25 Owner Hazardous Materials Report. The term "Owner Hazardous Materials Report" means the environmental reports made available to Optionee as part of the Property Documents. 1.26 Prime. The term "Prime" means the rate announced from time to time by Bank of America, N.T.&S.A. ("Bank of America") as its prime or reference rate. If Bank of America ceases to announce a prime, the prime lending rate of an equivalent lending institution selected by Owner will be substituted therefor. 1.27 Preliminary Report. The term "Preliminary Report" means the preliminary report to be issued by the Title Company with respect to the Property. 1.28 Property. The term "Property" means the real property that is the subject of this Agreement described in Exhibit "A" attached hereto and incorporated herein. 1.29 Property Documents. The term "Property Documents" means the documents relating to the Property made available to Optionee, including those listed on Schedule "1" attached hereto and incorporated herein. 1.30 Purchase Price. The term "Purchase Price" means the purchase price to be paid by Optionee to Owner for the purchase of the Property as determined pursuant to Article 2 of this Agreement. 1.31 Title Company. The term "Title Company" shall mean and refer to Chicago Title Company, 925 "B" Street, San Diego, California 92101. Article 2 GRANT OF OPTION 2.1 Grant of Option. Owner hereby grants to Optionee the exclusive option (the "Option") to purchase the Property upon the terms and conditions set forth herein. 2.2 Option Payments. The Option is granted in consideration of the mutual covenants and agreements contained herein, including Optionee's payment to Owner of the Option Payments set forth in this Section. 4 2.2.1 First Option Payment. On the Effective Date, Optionee shall deliver to Owner Cash in the amount of Fifty Thousand Dollars ($50,000.00) (the "First Option Payment"). If Optionee timely delivers a Notice of Disapproval to Owner, Owner shall return the First Option Payment to Optionee and this Agreement shall terminate as provided in Section 3.3 below. 2.2.2 Second Option Payment. If Optionee delivers a Notice of Approval, on or before the expiration of the Feasibility Period, Optionee shall deliver to Owner additional Cash in the amount of Four Hundred Fifty Thousand Dollars ($450,000.00) (the "Second Option Payment"). If Optionee does not timely deliver the Second Option Payment, this Agreement and the Option shall terminate as provided in Section 3.3 below. 2.2.3 Option Payments Earned Upon Delivery. Optionee acknowledges and agrees that the Optionee's Option Payments constitute consideration to Owner for the agreement of Owner to (a) enter into this Agreement with Optionee, (b) not sell the Property to other parties while this Agreement is in effect, and (c) subject to Optionee's properly exercising the Option, sell the Property to Optionee on the terms and conditions and for the Purchase Price set forth in this Agreement. Except as otherwise expressly provided in Section 3.3, the Option Payments shall be fully earned by Owner upon delivery thereof and non-refundable to Optionee, but the Option Payments actually made by Optionee shall be applicable to the Purchase Price if Optionee properly exercises the Option and the Close of Escrow occurs. 2.3 Exercise of Option. Optionee may exercise the Option at any time prior to 5:00 p.m. California time on the Option Expiration Date by (i) delivering to Owner and Escrow Agent written notice of exercise of the Option and (ii) delivering to Escrow the balance of the Purchase Price as provided in Section 2.4 below and the documents required by Section 3.4.1 below. If Optionee fails to timely exercise the Option pursuant to the terms of this Agreement, the Option shall terminate and Owner shall be entitled to retain the Option Payments and any Extension Payments (as defined below) as consideration for the granting of the Option to Optionee. 2.3.1 Extension of Option Expiration Date. Optionee will have the right to extend the Option Expiration Date by up to eighteen (18) periods of one (1) month each (each such extension shall be referred to as an "Extension") by delivering to Owner, at least five (5) Business Days prior to the Option Expiration Date, written notice thereof and an extension payment (the "Extension Payment") in an amount equal to Sixty Thousand Dollars ($60,000.00) for each Extension. Each Extension Payment shall be fully earned by Owner upon delivery thereof as consideration for the extension of the Option Expiration Date and shall be non-refundable to Optionee except as expressly provided in Section 3.3. Any Extension Payments made by Optionee shall not be applicable to the Purchase Price. Notwithstanding the foregoing, if the Close of Escrow does not occur or 5 is delayed due to Owner's default, then Optionee will not be required to pay any Extension Payment for the period of delay in the Close of Escrow caused by such default. 2.4 Purchase Price. Upon Optionee's timely exercise of the Option in accordance with Section 2.3 above, Owner shall be obligated to sell the Property to Optionee, and Optionee shall be obligated to purchase the Property, on the terms and conditions set forth in this Agreement. The Purchase Price shall be Four Million One Hundred Thousand Dollars ($4,100,000). Not later than one (1) Business Day prior to the Close of Escrow, Optionee shall deposit into Escrow Cash in an amount equal to the balance of the Purchase Price (i.e., the Purchase Price less the amounts of any Option Payments made by Optionee), together with an amount sufficient to cover all of Optionee's closing costs, fees and charges. Article 3 ESCROW; CLOSING; DELIVERIES 3.1 Escrow. Upon Optionee's exercise of the Option, the parties shall promptly thereafter deliver to Escrow Agent three (3) fully executed counterparts of this Agreement for use as escrow instructions and Escrow Agent shall execute the consent of Escrow Agent which appears at the end of this Agreement and deliver a fully executed original of this Agreement and the consent to Owner and Optionee. 3.2 Closing Date. The Close of Escrow ("Closing Date") shall occur on the date which is five (5) Business Days after the date Optionee exercises the Option in accordance with this Agreement. 3.3 Termination Based on Failure to Close by the Closing Date or Otherwise. Time is of the essence of each and every provision and each obligation of this Agreement. If Escrow fails to close by the Closing Date or if this Agreement is otherwise terminated for any reason other than Optionee's or Owner's default, then, except for any indemnity obligations of Optionee under this Agreement, the obligations of Optionee under Sections 5.3, 5.5, 13.11 and 13.20 of this Agreement and the obligations of Owner under Section 13.11 of this Agreement, which shall survive the termination of this Agreement, the respective rights, duties and obligations of Optionee and Owner under this Agreement shall forthwith terminate without further liability. The parties shall immediately thereafter sign such instructions and other instruments as may be necessary to effect the cancellation of this Escrow, and each party shall pay its respective share (if any) of Escrow cancellation charges as provided in Section 8.5. Upon cancellation due to no fault of Optionee pursuant to Sections 4.1, 4.2, 4.3 or 12.1, subject to Section 5.3 below, Escrow Agent shall immediately return the funds, if any, less applicable cancellation charges, and documents to the parties that furnished them and Owner shall return the Option Payments to Optionee. However, Optionee will not be entitled to a refund of any Extension Payments unless this Agreement is terminated due to Owner's default including any default under the last sentence of Section 4.2.1 or pursuant to Section 4.2.4 (Representations and Warranties of Owner). Optionee will not be entitled 6 to reimbursement for any costs, expenses, losses or damages incurred by Optionee in connection with Optionee's proposed use or development of the Property, whether prior to or subsequent to the execution hereof, and Owner will not be required to make any other payment to Optionee for alleged lost profits, interest or otherwise. Optionee waives and releases any claim it may now or hereafter have against Owner for such reimbursements or, payments. 3.4 Deliveries to Escrow Agent. 3.4.1 Optionee's Deliveries. At least one (1) Business Day immediately preceding the Closing Date, unless a different date for delivery is required under the terms of this Agreement, Optionee shall deliver to Escrow Agent each of the items described below. (a) Purchase Price. Cash in an amount equal to the balance of the Purchase Price as set forth in Section 2.4. (b) Prorations, Fees and Costs. The amounts, if any, required of Optionee under Article 8 of this Agreement and any other amounts required to be paid by Optionee prior to or on the Close of Escrow under this Agreement. (c) Documents. Executed counterparts of the Covenant (as defined in Section 5.8) and of any other documents required to be executed under the terms of this Agreement. 3.4.2 Owner's Deliveries. At least one (1) Business Day immediately prior to the Closing Date, unless an earlier date for delivery is required under the terms of this Agreement, Owner shall deliver to Escrow Agent each of the items described below. (a) Grant Deed. A grant deed substantially in the form of Exhibit "B" attached hereto and incorporated herein ("Grant Deed"). (b) Certificate of Non-Foreign Status. A transferor's certificate of non-foreign status attached to this Agreement as Exhibit "C" ("FIRPTA Certificate") properly executed by Owner and a California Form 590-RE ("Form 590"). (c) Documents. Executed counterparts of the Covenant (as defined in Section 5.8) and of any other documents required to be executed under the terms of this Agreement. 3.5 Dating Documents. Escrow Agent shall date any of the documents deposited into Escrow under Sections 3.4.1 and 3.4.2 above as of the date of the Close of Escrow. 7 Article 4 APPROVAL OF FEASIBILITY PERIOD AND CONDITIONS PRECEDENT TO CLOSE OF ESCROW 4.1 Feasibility Period. During the Feasibility Period, Optionee may analyze the feasibility of the acquisition, ownership, use and development of the Property. Optionee shall be solely responsible for any and all costs incurred by Optionee in connection with its review and/or investigations of the matters set forth in this Section. Owner shall allow Optionee to inspect and copy at Owner's office any and all reports, studies and documents relating to the Property that Owner may have in its actual possession (other than internally prepared marketing materials and other proprietary, confidential or privileged information) including the Property Documents described in Schedule "1" attached hereto and incorporated herein. Optionee acknowledges and agrees that Owner is making no representations or warranties regarding the accuracy, completeness or sufficiency of any such materials and that Optionee will rely solely on its review and investigation thereof. Optionee shall, subject to the requirements set forth in Section 5.5 below, conduct such independent investigations, studies and tests as it deems necessary or appropriate concerning Optionee's proposed use, sale, development and/or the suitability of the Property for Optionee's intended purposes. Owner at no cost to Owner agrees to reasonably cooperate with Optionee in connection with such studies and investigations. Such investigations may include, without limitation, investigations concerning the status of existing entitlements and approvals, if any, and the need for and availability of additional permits, licenses, entitlements or other approvals for development of the Property, investigations regarding the existence of any Hazardous Materials or any threatened or endangered species or archaeological artifacts, soils and geological conditions, the imposition or increase of any fees, charges or exactions by any Governmental Agencies, investigations regarding obligations to construct improvements or other facilities and/or to provide subdivision security in connection therewith and such economic feasibility and marketing studies as Optionee deems appropriate. 4.1.1 Approval or Disapproval of Feasibility Studies. If Optionee approves of its feasibility studies during the Feasibility Period, Optionee shall deliver Notice of Approval and the Second Option Payment to Owner prior to the expiration of the Feasibility Period. If Optionee gives written Notice of Approval of its investigations during its Feasibility Period, then Optionee will be deemed to have acknowledged that Optionee has conducted all investigations, reviewed the status of all existing and proposed entitlements and performed all analysis necessary to Optionee's decision to purchase the Property and has approved of such review and investigations and satisfied itself as to all aspects of the Property, including, without limitation, the matters described above. If, for any reason, Optionee determines, in its reasonable discretion, that it is not feasible for Optionee to purchase the Property, Optionee may terminate this Agreement by delivering written Notice of Disapproval to Owner prior to the expiration of the Feasibility Period. The failure of Optionee to 8 deliver such Notice of Disapproval to Owner prior to the expiration of the Feasibility Period shall be deemed to be Optionee's approval of its feasibility studies, in which case Owner shall be entitled to payment of the Second Option Payment and to retain the First Option Payment. If Optionee delivers the Notice of Disapproval on or before the expiration of the Feasibility Period, this Agreement shall terminate in accordance with Section 3.3 above. 4.2 Conditions Precedent to Optionee's Obligations. The following are conditions precedent to Optionee's obligation to purchase the Property: 4.2.1 Preliminary Report. Optionee may review and approve or disapprove, in its sole discretion, the Preliminary Report on or before 5:00 p.m. on or before the date that is twenty (20) days after the receipt by Optionee. If, prior to the Close of Escrow, the Title Company issues a supplemental preliminary report ("Supplemental Report") showing new title exceptions affecting the Property, Optionee shall have five (5) Business Days after receipt of the Supplemental Report to review and approve any such new exceptions, which approval shall not be unreasonably withheld with respect to any Supplemental Reports received after the Feasibility Period. Optionee shall be deemed to have approved any exceptions shown in the Preliminary Report and/or any such new exceptions shown in any Supplemental Report if it does not deliver written notice of disapproval to Owner during the applicable period set forth above in this Section. If Optionee timely disapproves any exceptions shown on the Preliminary Report or any new exceptions shown in a Supplemental Report, Owner shall have five (5) Business Days to elect to cure any such exceptions by delivering written notice to Optionee. If Owner does not deliver written notice that it will cure such disapproved exceptions within such time period, Owner shall be deemed to have elected not to cure such items. If Owner does not elect to cure any such disapproved items, Optionee shall have (i) two (2) Business Days after delivery of any notice from Owner of its election not to so cure such items or (ii) seven (7) Business Days after delivery of Optionee's notice of disapproval to Owner to either elect to waive its prior disapproval or to terminate this Agreement. If Optionee so elects to terminate this Agreement, then this Agreement shall terminate as provided in Section 3.3 above. Any title exceptions shown in the Preliminary Report and any exceptions shown in any Supplemental Report which are approved or deemed to be approved by Optionee shall be referred to as the "Permitted Exceptions." Owner agrees that it will not voluntary impose or create any exceptions to title that will be binding upon the Property after the Close of Escrow and will materially and adversely affect Optionee's proposed use and development of the Property unless Owner agrees to remove the same on or before the Close of Escrow. 4.2.2 Conveyance of Title. The Title Company shall be committed to issue an ALTA Standard Title Policy or, if requested by Optionee, an ALTA Extended Title Policy (subject to the conditions set forth below) ("Title Policy"), with the liability in an amount equal to the Purchase Price of the Property subject to: 9 (a) standard printed exceptions contained in the Title Policy; (b) all county and city taxes, assessments, special taxes and bonds which are a lien not yet due and payable, (c) all covenants, conditions, restrictions, easements, reservations, rights, rights of way, encumbrances and other items shown on the Preliminary Report or any Supplemental Report which are Permitted Exceptions; (d) the Covenant and all matters shown on the Grant Deed; and (e) title exceptions caused by the acts and omissions of Optionee. Optionee agrees that its receipt of the Title Policy will fully satisfy any express or implied warranty by Owner as to the condition of title to the Property, and, if there are any title exceptions or defects, including liens, encumbrances, covenants, conditions, reservations, restrictions, rights-of-way or easements, which constitute a defect in title, Optionee shall look solely to the remedies available under the Title Policy, and Owner shall have no responsibility or liability therefor. If Optionee requests an ALTA Extended Title Policy, Optionee shall be solely responsible for satisfying all conditions to the issuance of the ALTA Extended Title Policy, including obtaining any necessary survey, and for paying the premiums charged to issue the ALTA Extended Title Policy in excess of the premiums for an ALTA Standard Title Policy. In addition, Optionee's election to obtain an ALTA Extended Title Policy shall in no way delay the Closing Date. If, for any reason, Title Company does not commit to issue to Optionee an ALTA Extended Title Policy on the Closing Date, then this Section 4.2.2 shall be deemed satisfied so long as Title Company is committed to issue to Optionee an ALTA Standard Title Policy. After the Feasibility Period, Optionee does not have the right to terminate this Agreement as a result of any items appearing in any ALTA report, survey or inspection. 4.2.3 Agreement Upon Road Alignments. On or before the expiration of the Feasibility Period, Optionee and Owner shall have agreed upon two (2) alternate alignments for a road easement to be reserved by Owner in the Grant Deed (the "Road Alignments") and upon a configuration of the Road Alignments to facilitate vehicle entry into Optionee's parking facilities for its proposed future casino operations, including structuring turn lanes, lights, intersections, traffic configurations and other aspects of the Road Alignments to maximize reasonable access for such vehicles ("Access Improvements"). The road easement will be exclusive except that Optionee may use the road easement for purposes that do not interfere with use of the road by Owner and its invitees, successors and assigns and, if the road becomes a public road, such easement shall be exclusive except to the extent the County of San Diego allows other uses. Optionee will be solely responsible for obtaining approvals for and 10 paying the costs of any Access Improvements. As depicted on Exhibit "A-1" attached hereto and incorporated herein, the road easement area will contain approximately 8.5 acres. Owner will have the right to construct the road, at no expense to Optionee (except that Optionee shall be responsible for the cost of the Access Improvements, any other improvements that provide access to the Property and any other costs to accommodate Optionee's use or development of the Property) to County of San Diego requirements and specifications and shall reserve in the Grant Deed an easement for road, utility and related purposes, including the right to construct, install, repair, maintain and replace the road and related utilities. In addition, Optionee agrees that Owner shall have the right to require Optionee to convey a new road easement within the Road Alignments or fee title to the property within the road easement to the County for road purposes, in which case for no additional consideration, Optionee will promptly execute and deliver any documents reasonably necessary to effect such conveyance. Upon agreement on the Road Alignments and the Access Improvements, the parties shall execute an amendment to this Agreement setting forth the legal description of the Road Alignments and a description of the Access Improvements. If the parties are unable to reach agreement on the Road Alignments and/or the Access Improvements during the Feasibility Period, then either party may terminate this Agreement by delivering written notice to the other as provided in Sections 4.2.5 and 4.3.4. 4.2.4 Representations and Warranties of Owner. All of the representations and warranties of Owner contained in Section 6.7 shall be true and accurate in all material respects as of the Close of Escrow and shall survive the Close of Escrow for the period provided in Section 6.7. 4.2.5 Owner's Performance. Owner shall not be in default under the terms and conditions of this Agreement. 4.2.6 Failure to Satisfy Conditions Precedent. The conditions set forth in this Section 4.2 are for Optionee's benefit and can only be waived by Optionee. If the conditions precedent set forth in this Section and Section 4.3 are neither satisfied nor waived by the Closing Date, and provided that Optionee is not then in default under this Agreement, Optionee may terminate Escrow and this Agreement by giving written notice of termination to Owner and Escrow Agent. The Close of Escrow under this Agreement by Optionee constitute satisfaction of the conditions precedent set forth above. 4.3 Conditions Precedent to Owner's Obligations. The following are conditions precedent to Owner's obligation to close Escrow: 4.3.1 Optionee's Performance. Optionee shall not be in default under the terms and conditions of any written agreements between Owner and Optionee relating to the Property and all of Optionee's representations and warranties under Section 6.6 below shall be true and correct as of the Close of Escrow in all material respects. 11 4.3.2 Agreement on Road Alignments. Optionee and Owner shall have agreed upon the Road Alignments and the Access Improvements on or before the expiration of the Feasibility Period. 4.3.3 Failure to Satisfy Conditions Precedent. The conditions set forth in this Section 4.3 are for Owner's benefit and can only be waived by Owner. If the conditions precedent set forth in Sections 4.2 and 4.3, are neither satisfied nor waived by the Closing Date, Owner may terminate the Escrow and this Agreement by giving a written notice of termination to Optionee and Escrow Agent. Owner's inability to satisfy any of the conditions precedent set forth in Sections 4.2 (other than Section 4.2.5) and 4.3 as specified above by the Closing Date shall not be considered a breach of this Agreement. If Owner is unable to satisfy any such conditions precedent and if Optionee is not then in default under this Agreement, Optionee will be entitled, as its only remedy, to elect not to exercise the Option and obtain a refund of its Optionee's Option Payments (and, only to the extent provided in Section 3.3, any Extension Payments) pursuant to Section 3.3, and Optionee will not, under any circumstances, be entitled to any other reimbursement or to any other payment or compensation from Owner except as expressly provided in Section 10.1 in the event of a default by Owner. Article 5 COVENANTS AND AGREEMENTS 5.1 No Concern. Escrow Agent shall have no concern with, and no liability or responsibility for, this Article. 5.2 Additional Escrow Instructions. Optionee and Owner shall execute any additional escrow instructions not inconsistent with the terms of this Agreement that are reasonably required by Escrow Agent. 5.3 Assignment of Plans and Reports. If Escrow fails to close for any reason, then all materials delivered by Owner to Optionee, and all feasibility studies, economic reports, marketing studies, maps, surveys, environmental reports, civil and soil engineering reports, site plans, plans and specifications relating to the Property, and all other plans, reports and other documents or work relating to the Property (collectively, the "Plans and Reports") prepared by or on behalf of Optionee shall be deemed assigned to Owner, without consideration or expense to Owner and shall be delivered to Owner by Optionee as a condition to the return of the Option Payments to Optionee, if applicable, within ten (10) days thereafter. If requested by Owner, Optionee, within three (3) Business Days of Owner's request, shall execute an assignment of the Plans and Reports. Notwithstanding the provisions of this Section 5.3, Optionee shall be entitled to retain copies of all of the Plans and Reports. 5.4 Possession. Possession of the Property shall be transferred to Optionee upon the Close of Escrow. 12 5.5 Entry Onto Property. 5.5.1 Right to Enter. Provided Optionee has delivered to Owner a certificate of insurance satisfying the requirements set forth in Section 5.5.3 below, during the Feasibility Period, Optionee and Optionee's Agents shall have the right to enter onto the Property at reasonable times for the purpose of conducting investigations and inspections deemed necessary by Optionee, except as provided below. After expiration of the Feasibility Period, if this Agreement is still in effect, and provided Optionee has delivered to Owner a certificate of insurance satisfying the requirements set forth in Section 5.5.3 below and gives Owner written notice of any such entry at least two (2) Business Days in advance, Optionee and Optionee's Agents shall have the right to enter on to the Property at reasonable times for the purpose of conducting investigations and inspections deemed necessary by Optionee; provided, however, that other than initial site reconnaissance, Optionee shall not conduct any investigation, inspection or test on the Property without prior notice to Owner of the investigation, inspection or test to be undertaken (including, without limitation, with respect to any hazardous substance invasive testing, a written plan for the testing program) and Owner's prior written approval, which approval will not be unreasonably withheld, except as provided below. If Owner does not respond to Optionee's request within three (3) Business Days after receipt, then Optionee may send a second notice, and Owner's failure to disapprove in writing the request within two (2) Business Days after receipt of such second notice shall be deemed to constitute Owner's approval of the investigation, inspection or test described on the written notice to Owner. Optionee's notice may include a plan of extended and continual entry onto the Property to perform its due diligence studies which notice will describe the activities and work Optionee will perform. If Owner approves of such plan, Owner shall not then require a separate notice of any entry thereafter made in accordance with such plan. If such notice of extended entry does not clearly indicate the dates of any specific activity, then Optionee shall deliver a notice specifying the dates and type of investigation activity prior to any entry upon the Property in connection with such activity. Optionee shall provide to Owner, promptly upon receipt thereof, a copy of all written reports or other documents relating to the investigation or inspection or test of the Property. Optionee shall (a) perform all work permitted under this Agreement in a safe and professional manner; (b) not allow any dangerous or hazardous condition created by Optionee or Optionee's Agents to exist; (c) comply with all applicable laws and governmental regulations and any instruction deemed reasonably necessary by Owner; (d) obtain all permits required to be obtained by any Governmental Agencies and pay any fees, costs, charges and expenses in connection with the issuance of such permits; and (e) not interfere with Owner's activities and cooperate and coordinate its activities with Owner's activities. Owner shall have the right to have a representative accompany Optionee and its Agents at all times while on the Property. Optionee acknowledges that the Property may contain environmentally sensitive areas and natural hazards relating to undeveloped lands (including steep terrain and dangerous animals). Optionee shall be solely responsible for any damage to such sensitive areas and assumes the risk of such 13 natural hazards. In addition to the consents required above, any investigation, inspection or test (whether occurring during or after the Feasibility Period) which physically alters or changes the conditions of the Property or that may adversely affect any environmentally sensitive areas or endangered or threatened species within the Property shall be subject to Owner's prior written approval, which approval may be withheld in Owner's sole and absolute discretion. If the transaction contemplated by this Agreement does not close, Owner shall have the option to require Optionee, forthwith after termination of this Agreement, at its sole cost and expense, repair any damage to the Property caused by Optionee or its Agents. If Optionee fails to repair any such damage to the satisfaction of Owner, and such failure continues for ten (10) days after written notice thereof from Owner, then Owner may perform such repair on behalf of Optionee without any liability to Optionee for any loss or damage by reason therefor, and upon completion, Optionee shall pay Owner's costs for making such repairs plus ten percent (10%) of such costs for overhead. Any amounts due hereunder shall include interest from the date of notice thereof to Optionee of the costs incurred by Owner at the rate of Prime plus two percent (2%) per annum, but in no event shall the interest rate exceed the maximum rate allowed by law. 5.5.2 Indemnity of Owner. Optionee shall indemnify, protect, defend (with legal counsel reasonably acceptable to Owner) and hold Owner, its development manager and their past, present and future employees, officers, directors, agents, representatives, members, managers, shareholders and affiliates and their respective successors and assigns ("Owner's Indemnitees") harmless from any and all claims, actions, costs, expenses, damages and liabilities relating to Optionee's or Optionee's Agents' entry onto the Property (including, but not limited to, claims of mechanics liens and attorneys' fees) and from and against all costs, attorneys' fees, expenses and liabilities incurred in connection with such claims or any actions or proceedings brought thereon and any costs or expenses, including attorneys' fees, incurred by Owner in connection with the enforcement of this indemnification provision. Optionee's covenants in this Section shall survive the termination of this Agreement and shall be binding on Optionee until such time as an action against Owner is absolutely barred by the applicable statute of limitations. 5.5.3 Insurance. Optionee shall maintain, with insurance companies acceptable to Owner, the following insurance: Worker's Compensation Insurance as required by law and Employer's Liability Insurance; Comprehensive General Liability or Commercial General Liability insurance (occurrence form only; not claims made or modified occurrence form), with limits of not less than Two Million Dollars ($2,000,000) combined single limit and not less than Two Million Dollars ($2,000,000) on a general aggregate basis, for bodily injury, death and property damage; and business automobile coverage with limits of at least Two Million Dollars ($2,000,000) per occurrence and aggregate. Each policy of insurance shall name Owner and its members as additional insureds. Further, each policy of insurance shall state that such policy is primary and noncontributing with any insurance carried by Owner or its members. Such policy shall contain a provision that the naming of the additional insured shall not 14 negate any right the additional insured would have had as a claimant under the policy if not so named and shall contain severability of interest and cross-liability clauses. A certificate, together with certified copies of all endorsements to the policy required to evidence the coverage which is to be obtained hereunder, shall be delivered to Owner prior to any entry onto the Property. The certificate shall expressly provide that no less than thirty (30) days prior written notice shall be given Owner in the event of any material alteration to or cancellation of the coverages evidenced by said certificate. A renewal certificate for each of the policies required in this Section shall be delivered to Owner not less than thirty (30) days prior to the expiration date of the term of such policy. Any policies required by the provisions of this Section may be made a part of a blanket policy of insurance with a "per project, per location endorsement" so long as such blanket policy contains all of the provisions required herein and does not reduce the coverage, impair the rights of the other party to this Agreement or negate the requirements of this Agreement. 5.6 No Public Report Optionee represents and warrants that it is an experienced and sophisticated buyer represented by legal counsel and not in need of consumer protection offered by a Public Report pursuant to California Business and Professions Code Section 11018.2. Optionee acknowledges that Owner will not obtain a Public Report in conjunction with the sale of the Property to Optionee and waives any right of rescission arising out of the absence of a Public Report. 5.7 Public Facilities Financing Districts. Optionee acknowledges that the Property is subject to the lien of special taxes imposed by Chula Vista City School District Community Facilities District No. 1, Chula Vista Elementary School District Community Facilities District No. 1 and City of Chula Vista Assessment District 90-2 (such districts and any other existing districts shall be collectively referred to as the "Districts"). Prior to the Effective Date, Optionee has executed a Notice of Special Tax in the form of Exhibit "D" attached hereto and incorporated herein. Subject to Optionee's right to disapprove any exceptions shown in a Supplemental Report pursuant to Section 4.2.1, any other such Districts are formed, Owner shall have the right to require Optionee to execute any Notices of Special Tax prepared by Owner and Optionee shall within three (3) Business Days after receipt therefrom execute such Notice of Special Tax. 5.8 Right to Approve Development. Owner will retain certain property located adjacent to the Property ("Adjacent Property"). Owner shall have the right to approve any improvements Optionee proposes to construct within five hundred (500) feet of the boundary line between the Property and any Adjacent Property, which approval shall not be unreasonably withheld or delayed. Similarly, Optionee shall have the right to approve any improvements proposed to be constructed by Owner within five hundred (500) of the boundary line between the Property and the Adjacent Property (other than improvements relating to the road described in Section 4.2.3), which approval shall not be unreasonably withheld or delayed. Optionee acknowledges that Owner intends to improve all or part of the Adjacent Property with estate homes with an aggregate density not greater than five (5) homes per acre or more and Optionee hereby approves of any 15 such improvements on the Adjacent Property. Without limiting Owner's approval rights under this Section, Owner acknowledges that Optionee intends to improve a portion of the Property with a gambling casino, parking and related facilities. Upon the Close of Escrow, a covenant running with the land ("Covenant") in the form of Exhibit "F" attached hereto and incorporated herein executed and acknowledged by Owner and Optionee shall be recorded against the Property and the Adjacent Property. 5.9 Changes to Physical Condition. Except as contemplated by Section 5.8, so long as this Agreement is in effect, Owner will not make any changes to the physical condition of the Property that would materially and adversely affect Optionee's proposed use and development of the Property without Optionee's consent. Article 6 REPRESENTATIONS AND WARRANTIES 6.1 Optionee's Independent Investigations Regarding the Property. By its execution of this Agreement, Optionee acknowledges that it has made or will make its own independent investigations as deemed necessary or appropriate concerning the use, sale, development or suitability for development of the Property and the status of any Governmental Approvals for the Property. Except as otherwise specifically provided in Section 6.7 of this Agreement, Optionee is relying solely on its own investigations and not on any representations made by Owner. Optionee acknowledges that Owner has made no representations regarding any development potential of the Property, the physical condition of the Property, the status of any existing, pending or future entitlements and/or the necessity or existence of any fees, dedications, charges or costs associated with the development or marketing of the Property or future regulations relating to the Property or whether any approvals or permits may be required or granted or, if granted, whether such approvals or permits may be subject to reversal by reason of challenges thereto by private parties or Governmental Agencies. If any of the matters investigated by Optionee changes after the Feasibility Period or new regulations or requirements of Governmental Agencies are imposed or there is a challenge or reversal of any approvals or permits previously obtained, Optionee will not be entitled to rescind this Agreement or its purchase of any portion of the Property or to a return of its Option Payments. 6.2 As-Is Purchase. Optionee is relying solely upon its own inspection, investigation and analyses of the foregoing matters in entering into this Agreement and, except for the express representations and warranties of Owner set forth in Section 6.7, is not relying in any way upon any representations, statements, agreements, warranties, studies, reports, descriptions, guidelines or other information or material furnished by Owner or its representatives, whether oral or written, express or implied, of any nature whatsoever regarding any such matters. Optionee further acknowledges and agrees that the Property Documents and other documents or information provided by Owner to Optionee are being made available to Optionee for informational purposes only, and, Owner is making no representations or warranties regarding such 16 Property Documents, other documents or other information, including, without limitation, the accuracy or completeness of any information contained therein. Optionee will acquire the Property, if at all, on the Close of Escrow in its then "As-Is" state and condition, without representation by Owner or its representatives as to any matter, whether or not expressly mentioned herein. Optionee, by its execution of this Agreement, represents and covenants that Optionee will, during the Feasibility Period, satisfy itself as to the condition of the Property and their suitability for the development purposes intended by Optionee. No patent or latent condition affecting the Property in any way, whether or not known or discoverable or hereafter discovered (collectively, the "Property Conditions"), shall give Optionee the right to obtain a refund of its Option Payments or affect its obligation to purchase the Property or any other obligation contained in this Agreement, nor shall give rise to any right of damages, specific performance, rescission or otherwise against Owner. Optionee acknowledges that Owner only recently acquired the Property pursuant to an estate sale administered by the Probate Court and has very limited information regarding the Property. 6.3 Governmental Approvals. Optionee acknowledges that in entering into this Agreement it is relying solely upon its own investigations regarding any requirements for Governmental Approvals and not upon any representations made by Owner. Owner makes no representation or warranties regarding the development and/or use of the Property or any part thereof. Optionee has sole responsibility for processing approvals and constructing improvements on the Property. Owner has not obtained, and by accepting the Optionee's Option Payments hereunder, Owner is not warranting that it has and will have obtained, any governmental permits or other approvals for the development of the Property. All expenses and responsibility associated with obtaining any Governmental Approvals shall be the sole responsibility of Optionee. If Optionee fails to obtain any Governmental Approvals required for development of the Property, Optionee will not be entitled to rescind this Agreement, to the return of its Option Payments or to reimbursement for any costs or expenses incurred by Optionee in connection with Optionee's investigations or development of the Property, whether prior or subsequent to the execution hereof, and Owner will not, under any circumstances, make any other payment to Optionee for alleged lost profits or otherwise. Optionee hereby waives and absolutely releases any claim it may now or hereafter have against Owner for such reimbursements or payments. Without limiting the generality of the foregoing, Optionee will not have the right to any such payment because of Optionee's inability to obtain construction or permanent financing for any Property, or by reason of any claim under the doctrine of impossibility of performance. 6.4 Investigations Regarding Districts. Optionee shall make its own investigations regarding the formation of any pending Districts or any Districts formed prior to the Close of Escrow that may affect the Property and the improvements that may be constructed under such Districts. 17 6.5 Natural Hazard Disclosure Act. Prior to the Closing Date, Owner shall provide Optionee with a Natural Hazard Disclosure Statement ("Natural Hazard Disclosure Statement") in substantially the form attached hereto as Exhibit "E" and incorporated herein by this reference pursuant to the Natural Hazard Disclosure Act, California Government Code Sections 8589.3, 8589.4, and 51183.5, and California Public Resources Code Sections 2621.9, 2694, and 4136, and any successor statutes or laws (collectively, the "Act"), provided that if, as of the Close of Escrow, the Act does not require delivery of the Natural Hazards Disclosure Statement to Optionee, then Owner shall have no obligations under this Section. Optionee acknowledges and agrees that nothing contained in the Natural Hazard Disclosure Statement shall release Optionee from its obligation to fully investigate the condition of the Property, including, without limitation, whether the Property is located in any natural hazard areas and that Optionee has the expertise to perform such investigations and has agreed to do so under the terms of this Agreement. Optionee further acknowledges and agrees that the matters set forth in the Natural Hazard Disclosure Statement may change on or prior to the Close of Escrow and that Owner has no obligation to update, modify, or supplement the Natural Hazard Disclosure Statement. The provision of the Natural Hazard Disclosure Statement to Optionee shall not be deemed or construed to limit the scope or effect of Optionee's waiver under Section 6.9 or the provisions contained in this Article. Optionee shall be solely responsible for preparing and delivering its own Natural Hazard Disclosure Statement to subsequent prospective purchasers of the Property. 6.6 Optionee's Representations and Warranties. In addition to any other representations and warranties of Optionee hereunder, Optionee makes the following representations and warranties to Owner. Such representations and warranties shall be true and correct as of the Effective Date and on the Closing Date, and shall survive the Close of Escrow. Optionee agrees to indemnify, defend and hold Owner harmless from and against any losses, costs, damages and expenses (including, but not limited to, reasonable attorneys' fees and costs) incurred by Owner to the extent arising from any material breach by Optionee of its representations and warranties set forth in this Section 6.6. 6.6.1 Ownership of Optionee. The sole members of Lakes Kean Argovitz Resorts-California, LLC are Lakes Gaming Inc. ("Lakes Gaming") and Kean Argovitz Resorts, Inc. ("Resorts"). Kevin Kean and Jerry Argovitz own one hundred percent (100%) of the stock of Resorts and control the management of Resorts. Lakes is a publicly traded company listed on NASDAQ. Neither Kevin Kean, Jerry Argovitz nor any of the officers or directors of Lakes Gaming (i) have been convicted of a felony, (ii) are under indictment or, to their knowledge, under investigation by any governmental authority for fraud or other activities that would constitute a felony or (iii) are prohibited from doing business in any state as a result of past activities. 6.6.2 Optionee's Authority. Optionee is a duly organized and validly existing limited liability company formed under the laws of the State of Delaware and duly qualified to transact business in the State of California. The 18 entry by Optionee into the transaction contemplated by this Agreement and the performance by Optionee of all of its obligations in connection herewith have been duly and validly authorized by all necessary action(s), are in accordance with applicable law and are not in violation of Optionee's articles of formation or operating agreement. This Agreement and all additional documents delivered in connection with this Agreement have been duly and validly executed and delivered to Optionee and constitute the legal, valid and binding obligations of Optionee. Each individual signing this Agreement on behalf of Optionee represents and warrants to Owner that he or she has authority to do so. 6.7 Owner's Representations and Warranties. For purposes of this Section, the term "actual knowledge" of Owner or any other similar term shall mean the actual knowledge of R. Randy Goodson and Paul Borden without investigation or inquiry or duty of investigation or inquiry. These two representatives of Owner are the primary two officers of Owner involved in the acquisition of the Property and the management and ownership of the Property for Owner. Such individuals are making such representations and warranties on behalf of Owner in their capacities as officers of Owner and not in their individual capacities and, as a result, Owner (and not such individuals) shall be liable in the event of a breach of such representations. Such representations and warranties shall be true and correct as of the Effective Date and, unless Owner provides Optionee with written notice of any change in such representations and warranties, on the Closing Date, and shall survive the Closing Date only for a period of one year. If Owner gives Optionee notice of any change in the representations and warranties prior to the Close of Escrow, and if Optionee nevertheless elects to proceed with the Close of Escrow, Optionee shall be deemed to have waived any and all claims and other rights against Owner with respect to the matters described in such notice. Owner will give Optionee notice of any such change no later than the later of (i) five (5) Business Days prior to the Closing Date or (ii) one (1) Business Day after Owner obtains actual knowledge of such change. Any and all claims and other rights relating to any actual or alleged breach of the representations and warranties contained in this Section shall be deemed fully waived and released on the date which is one (1) year after the Closing Date except to the extent any such claims or rights are set forth in an action brought by Optionee against Owner no later than one (1) year after the Closing Date. Subject to the foregoing time limitation on claims, Owner agrees to indemnify, defend and hold Optionee harmless from and against any losses, costs, damages and expenses (including, but not limited to, reasonable attorneys' fees and costs) incurred by Optionee to the extent resulting from any material breach by Owner of Owner's representations and warranties set forth in this Section 6.7. 6.7.1 Pending Actions or Proceedings. Except as disclosed in the Property Documents or this Agreement, Owner has no actual knowledge of (i) any claims, actions, suits, condemnation actions or other proceedings pending or threatened by any person or entity, or (ii) any violations of any law, statute, governmental regulation or requirement that, in either case, may materially and adversely affect the Property. 19 6.7.2 No Agreements. To Owner's actual knowledge, there are no agreements, leases, occupancy agreements, rights of first refusal, or options to purchase that will be binding upon the Property after the Close of Escrow, except as disclosed in the Property Documents or in the Preliminary Report or otherwise included as part of the Permitted Exceptions. 6.7.3 Hazardous Materials. To Owner's actual knowledge, no party has caused or permitted, any generation, location, transportation, storage, treatment, discharge, disposal or release of any Hazardous Materials upon or under the Property in violation of any Environmental Laws, except as disclosed in the Property Documents or in this Agreement. 6.7.4 Owner's Authority. Owner is a duly organized and validly existing limited liability company formed under the laws of the State of Delaware, duly qualified to transact business in the State of California. The entry by Owner into the transaction contemplated by this Agreement and the performance by Owner of all of its obligations in connection herewith have been duly and validly authorized by all necessary action(s), are in accordance with applicable law and are not in violation of Owner's operating agreement or other relevant agreements. This Agreement and all additional documents delivered in connection with this Agreement have been duly and validly executed and delivered to Optionee and constitute the legal, valid and binding obligations of Owner. 6.7.5 Title Defects. To Owner's actual knowledge, there are no defects in Owner's title to the Property, except as disclosed in the Property Documents or in the Preliminary Report or otherwise included as part of the Permitted Exceptions. 6.8 Hazardous Materials. 6.8.1 Hazardous Materials Report. By its execution of this Agreement, Optionee acknowledges its receipt of the Owner Hazardous Materials Report. Optionee acknowledges and agrees that the Owner Hazardous Materials Report is provided by Owner for informational purposes only, that Owner does not make any representations or warranties as to the accuracy or completeness of the Owner Hazardous Materials Report. 6.8.2 Optionee's Independent Review. Optionee shall conduct its own investigations and studies of the Property as it deems necessary or appropriate to determine the presence or absence of Hazardous Materials on or within the Property. Optionee for itself and Optionee's Agents hereby (a) agrees that Optionee is relying solely on its own investigation of the Property covering the effect of any Hazardous Materials that may be on or within the Property, whether disclosed by such investigations or not (collectively, the "Hazardous Materials Effects") and (b) assumes the risk of any and all liabilities, claims, demands, suits, judgments, losses, damages, expenses (including, without limitation, attorneys' fees) and other obligations arising out of or incurred in connection with the Hazardous Materials Effects, if any. 20 6.9 Assumption of Risks, Release and Indemnity. To the maximum extent permitted by law, Owner and Owner's Indemnitees shall not be liable for any loss, damage, injury or claim of any kind or character to any person or property arising from or caused by: (a) the Property Conditions, the Property, the development or use of the Property, and/or the construction, use or sale of improvements on the Property; (b) the design, construction, engineering or other work with respect to the Property provided or performed by or caused by or attributed to Owner or Owner's Indemnitees either before or after the Effective Date and/or the Close of Escrow, including any defects therein; (c) a violation or alleged violation by Optionee, its employees or agents of any law now or hereinafter enacted; (d) any slope failure or subsurface geologic or groundwater condition; (e) the design, construction, engineering or other work with respect to the Property provided or performed by or caused by or attributable to Optionee or Optionee's Agents either before or after the Close of Escrow, including any defect therein; (f) the application of the principles of strict liability with respect to any act or omission by Optionee or Optionee's Agents in connection with the Property; (h) the delivery of the Natural Hazards Disclosure Statement; (i) any other cause whatsoever in connection with Optionee's use of the Property or Optionee's performance or breach under this Agreement; and (j) any Hazardous Materials Effects (collectively, the "Assumed Risks"). Optionee, for itself and for the Optionee's Agents, hereby releases, waives, discharges, covenants not to sue, indemnifies, protects, defends (with legal counsel acceptable to Owner) and agrees to hold harmless Owner and Owner's Indemnitees, and each of them, from and against any and all any liability, loss, damage, injury, claim, cost and expense (including attorneys' fees and costs) of any kind or character to any person or property arising from, related to or caused by the Assumed Risks. The foregoing waiver and indemnity shall apply to any claim or action brought by a private party or by a Governmental Agency under any statute or common law now or hereinafter in effect. With respect to design, construction methods, materials, locations and other matters for which Owner has given or will give its approval, recommendation or other direction, the foregoing waiver and indemnity shall apply irrespective of Owner's approval, recommendation or other direction. Optionee agrees that the above waiver and release extends to all claims of any nature and kind whatsoever, known or unknown, suspected or unsuspected, and Optionee, for itself and for the Optionee's Agents, waives the benefits of California Civil Code Section 1542, which provides as follows: "A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the releasee, which if known by him must have materially affected his settlement with the debtor." Notwithstanding anything to the contrary set forth in this Section, nothing contained in this Section shall operate to relieve Owner or Owner's Indemnitees from any loss, damage, injury or claim to the extent found by a court of 21 competent jurisdiction to have been caused primarily by the active negligence or willful misconduct of Owner or the Owner's Indemnitees (but the act or failure to act of any consultant, contractor, or other agent or representative of Owner or any Owner's Indemnitee other than an officer or employee of Owner shall not be attributed to Owner or such Owner's Indemnitee). Article 7 THE CLOSING 7.1 Close of Escrow. Escrow Agent shall close the Escrow on the Closing Date by (i) filing for record the Covenant, the Grant Deed and such other documents as may be necessary to procure the Title Policy and (ii) delivering funds and documents as set forth in Article 9 WHEN AND ONLY WHEN each of the conditions set forth below has been satisfied. 7.1.1 Funds and Instruments. All funds and instruments required pursuant to Article 3 have been delivered to Escrow Agent. 7.1.2 Satisfaction of Conditions Precedent. Each of the conditions precedent set forth in Article 4 has been, or upon such closing shall be, satisfied as provided for in Article 4. 7.2 Recordation. Escrow Agent shall file the Grant Deed for recordation in the Office of the County Recorder for San Diego County. 7.3 Earlier Closing. If all of the conditions set forth in Sections 7.1.1 and 7.1.2 become satisfied at a date earlier than the Closing Date, Escrow Agent shall close the Escrow at such earlier date if Escrow Agent obtains the consent of Optionee and Owner to do so. Article 8 PRORATIONS, FEES AND COSTS 8.1 Thirty Day Month. Escrow Agent will prorate between the parties, in cash, to the Close of Escrow, County, city and special district (if any) real property taxes and assessments for the Property based on the latest information available to Escrow Agent. All prorations and/or adjustments called for in this Agreement are to be made on the basis of a thirty (30) day month, unless otherwise specifically instructed in writing. 8.2 Supplemental Taxes. Any supplemental taxes arising on or after the Close of Escrow shall be the sole responsibility of Optionee. 8.3 Owner's Fees and Costs. Owner shall pay (i) County Documentary Transfer Tax in the amount Escrow Agent determines to be required by law, (ii) the fee for the ALTA Standard Title Policy premium for the Property, (iii) one-half of Escrow Agent's escrow fee and (iv) usual seller's document-drafting and recording charges. 22 8.4 Optionee's Fees and Costs. Optionee shall pay (i) one-half of Escrow Agent's escrow fee, (ii) usual buyer's document-drafting and recording charges, (iii) if Optionee has requested an ALTA insurance policy, the difference between the cost of an ALTA Standard Title Policy and an ALTA Extended Title Policy, (iv) the cost for the joint protection or ALTA Lender's Title Policy, and (v) the fee for any surveys obtained by Optionee and any endorsements requested by Optionee. 8.5 Escrow Cancellation Charges Due to a Default. If Escrow fails to close due to either party's default, the defaulting party shall pay all Escrow cancellation charges. If Escrow fails to close for any reason other than the foregoing, Optionee and Owner shall each pay one-half (1/2) of any Escrow cancellation charges. "Escrow cancellation charges" means all fees, charges and expenses incurred by Escrow Agent, including all expenses incurred in connection with issuance of the Preliminary Report and other title matters. Article 9 DISTRIBUTION OF FUNDS AND DOCUMENTS 9.1 Deposit of Funds. All cash, if any, received hereunder by Escrow Agent shall be, until the Close of Escrow unless earlier released pursuant to the terms of this Agreement, kept on deposit in an interest bearing account reasonably acceptable to Optionee and Owner. 9.2 Payment of Liens at Closing. At the Close of Escrow, Escrow Agent shall pay, from funds to which Owner is entitled and from funds, if any, deposited by Owner with Escrow Agent, to the obligees thereof all liens and encumbrances other than those permitted by this Agreement to be shown in the Title Policy. 9.3 Recorded Documents. Escrow Agent shall cause the County Recorder of San Diego County to mail Owner's Grant Deed (and each other document which is herein expressed to be, or by general usage is, recorded) after recordation, to the grantee, beneficiary or person (i) acquiring rights under said document or (ii) for whose benefit said document was acquired. 9.4 Unrecorded Documents. At the Close of Escrow, Escrow Agent shall deliver by United States mail (or will hold for personal pickup, if requested) one (1) copy of each nonrecorded document received under this Agreement by Escrow Agent to the payee or person (i) acquiring rights under the document or (ii) for whose benefit the document was acquired. Copies of any original documents delivered to one party shall be delivered to the other party. 9.5 Payment of Funds at Closing. At the Close of Escrow, Escrow Agent shall wire (i) to Owner's account, or order, in accordance with instructions of 23 Owner, or shall hold for personal pickup, if requested, the Cash, plus any proration or other credits to which Owner is be entitled less any appropriate proration or other charges and (ii) to Optionee, or order, any excess funds theretofore delivered to Escrow Agent by Optionee. 9.6 Conformed Copies. At the Close of Escrow, Escrow Agent shall deliver to Owner a copy of the Owner's Grant Deed (conformed to show recording date) and each document recorded to place title in the condition required by the Agreement. Article 10 REMEDIES 10.1 LIMITATION ON OPTIONEE'S REMEDIES. AS A MATERIAL INDUCEMENT AND CONSIDERATION FOR OWNER TO ENTER INTO THIS AGREEMENT, OPTIONEE ACKNOWLEDGES AND AGREES THAT IT IS BUYING THE PROPERTY FOR COMMERCIAL PURPOSES, THAT THE PROPERTY IS NOT UNIQUE AND THAT THERE IS OTHER PROPERTY THAT IS AVAILABLE IN SAN DIEGO COUNTY. ACCORDINGLY, OPTIONEE ACKNOWLEDGES AND AGREES THAT IF OWNER DEFAULTS IN THE PERFORMANCE OF ANY OF ITS MATERIAL OBLIGATIONS UNDER THIS AGREEMENT, OPTIONEE'S SOLE AND EXCLUSIVE REMEDY SHALL BE TO TERMINATE THIS AGREEMENT BY WRITTEN NOTICE DELIVERED TO OWNER, RECEIVE A REFUND OF THE OPTION PAYMENTS AND ANY EXTENSION PAYMENTS TOGETHER WITH INTEREST THEREON AT THE PRIME RATE, AND RECOVER AN AMOUNT EQUAL TO OPTIONEE'S ACTUAL OUT OF POCKET COSTS IN CONNECTION WITH ITS INVESTIGATIONS OF THE PROPERTY UP TO A MAXIMUM AMOUNT OF ONE HUNDRED FIFTY THOUSAND DOLLARS ($150,000.00). OPTIONEE SHALL NOT BE ENTITLED UNDER ANY CIRCUMSTANCES TO RECOVER ANY OTHER DAMAGES, INCLUDING LOST PROFITS RELATING TO OPTIONEE'S PROPOSED DEVELOPMENT OF THE PROPERTY AND ANY OTHER COMPENSATORY OR CONSEQUENTIAL DAMAGES, AND OPTIONEE HEREBY EXPRESSLY AND KNOWINGLY WAIVES ANY AND ALL RIGHTS TO RECOVER ANY SUCH OTHER DAMAGES THAT MIGHT OTHERWISE EXIST, INCLUDING ANY RIGHTS UNDER CALIFORNIA CIVIL CODE SECTION 3306. OPTIONEE FURTHER EXPRESSLY AND KNOWINGLY WAIVES ANY AND ALL OTHER REMEDIES THAT MIGHT OTHERWISE BE AVAILABLE AT LAW OR IN EQUITY AGAINST OWNER, INCLUDING, WITHOUT LIMITATION, ANY AND ALL RIGHTS TO PURSUE AN ACTION AGAINST OWNER FOR SPECIFIC PERFORMANCE. OPTIONEE SHALL NOT PREPARE, FILE OR RECORD A LIS PENDENS AGAINST THE PROPERTY IF OWNER DEFAULTS IN THE PERFORMANCE OF ANY OF ITS OBLIGATIONS UNDER THIS AGREEMENT AND EXPRESSLY WAIVES ANY AND ALL RIGHTS TO DO SO. OPTIONEE ACKNOWLEDGES THAT A MATERIAL INDUCEMENT TO OWNER'S DECISION TO SELL THE PROPERTY TO OPTIONEE IS THE 24 AGREEMENT OF OPTIONEE NOT TO IMPEDE OR INTERFERE WITH A SUBSEQUENT SALE OF THE PROPERTY BY FILING AN ACTION FOR SPECIFIC PERFORMANCE AND/OR FILING A LIS PENDENS AGAINST THE PROPERTY, AND THAT OWNER WILL BE DAMAGED IF OPTIONEE FAILS TO COMPLY WITH THE REQUIREMENTS OF THIS SECTION. NOTWITHSTANDING THE FOREGOING, IF THE CLOSE OF ESCROW DOES NOT OCCUR DUE TO OWNER'S DEFAULT, OPTIONEE MAY ELECT, AS AN ALTERNATIVE TO THE REMEDY SET FORTH ABOVE, AS ITS SOLE AND EXCLUSIVE REMEDY, TO SPECIFICALLY ENFORCE OWNER'S OBLIGATION TO EXECUTE AND DELIVER THE GRANT DEED AND TO CONVEY THE PROPERTY TO OPTIONEE. OPTIONEE SHALL NOT HAVE THE RIGHT TO SPECIFICALLY ENFORCE ANY OF OWNER'S OTHER OBLIGATIONS UNDER THIS AGREEMENT REQUIRED TO BE PERFORMED PRIOR TO THE CLOSE OF ESCROW AND SHALL NOT HAVE THE RIGHT TO RECOVER DAMAGES OF ANY KIND OR TO OBTAIN OTHER EQUITABLE RELIEF, INCLUDING, WITHOUT LIMITATION, ANY EQUITABLE ADJUSTMENT TO THE TERMS OF THE SALE OF THE PROPERTY, IN CONNECTION WITH ANY SUCH ACTION FOR SPECIFIC PERFORMANCE. AS A CONDITION PRECEDENT TO OPTIONEE'S ELECTION TO PURSUE AN ACTION FOR SPECIFIC PERFORMANCE, OPTIONEE SHALL HAVE FULLY PERFORMED ALL OF OPTIONEE'S OBLIGATIONS AND MADE ALL DELIVERIES REQUIRED TO BE PERFORMED OR DELIVERED ON OR BEFORE THE CLOSE OF ESCROW, INCLUDING WITHOUT LIMITATION, DELIVERING TO ESCROW THE BALANCE OF THE PURCHASE PRICE AND ALL OTHER FUNDS REQUIRED OF OPTIONEE ("CLOSING FUNDS") AND WITHOUT ASSERTING ANY EXCUSE OF OPTIONEE'S PERFORMANCE DUE TO OWNER'S DEFAULT OR OTHERWISE; PROVIDED, HOWEVER, IF OPTIONEE THEN HAS THE RIGHT TO ONE OR MORE EXTENSIONS PURSUANT TO SECTION 2.3.1, THEN OPTIONEE MAY PURSUE AN ACTION FOR SPECIFIC PERFORMANCE SO LONG AS (i) OPTIONEE PROPERLY EXERCISES ITS EXTENSIONS AND FULLY PERFORMS ITS OBLIGATIONS HEREUNDER, INCLUDING TIMELY PAYING DIRECTLY TO OWNER, OUTSIDE OF ESCROW, CASH IN AN AMOUNT EQUAL TO EACH EXTENSION PAYMENT, (ii) OPTIONEE TIMELY EXERCISES THE OPTION AND (iii) ON OR BEFORE THE CLOSING DATE, OPTIONEE FULLY PERFORMS ALL OF OPTIONEE'S OTHER OBLIGATIONS AND MAKES ALL DELIVERIES, INCLUDING DELIVERY OF THE CLOSING FUNDS, REQUIRED TO BE PERFORMED OR DELIVERED ON OR BEFORE THE CLOSE OF ESCROW, ALL WITHOUT ASSERTING ANY EXCUSE OF OPTIONEE'S PERFORMANCE. OPTIONEE ACKNOWLEDGES THAT OPTIONEE'S FULL PERFORMANCE OF ITS OBLIGATIONS UNDER SECTIONS 2.3.1 AND 3.4.1 ABOVE IN EVERY DETAIL IS MATERIAL TO OWNER, AND THEREFORE, IF OPTIONEE FAILS TO SATISFY ANY SUCH REQUIREMENTS, OWNER SHALL BE ENTITLED TO AN IMMEDIATE DISMISSAL OF ANY SUCH ACTION AND AN IMMEDIATE EXPUNGEMENT OF ANY LIS PENDENS; PROVIDED, HOWEVER, IF OWNER DOES NOT DELIVER THE 25 GRANT DEED TO ESCROW AGENT WITHIN THREE (3) BUSINESS DAYS AFTER OWNER RECEIVES NOTICE THAT OPTIONEE HAS DELIVERED THE CLOSING FUNDS TO ESCROW AGENT, ESCROW AGENT SHALL AUTOMATICALLY AND WITHOUT FURTHER INSTRUCTIONS RETURN THE CLOSING FUNDS TO OPTIONEE, AND SUCH ACTION SHALL NOT AFFECT OPTIONEE'S RIGHTS UNDER THIS SECTION. 10.2 WAIVER OF PUNITIVE DAMAGES. OPTIONEE AND OWNER EACH WAIVE ANY AND ALL RIGHTS AGAINST THE OTHER TO AN AWARD OF PUNITIVE DAMAGES WITH RESPECT TO ANY DISPUTE BETWEEN THEM RELATING TO THIS AGREEMENT. Article 11 ASSIGNABILITY; BANKRUPTCY 11.1 Assignment by Optionee. Optionee may not, voluntarily or by operation of law, assign or otherwise transfer any of its rights or obligations under this Agreement without obtaining the prior written consent of Owner, which consent may be withheld by Owner in its sole, arbitrary and absolute discretion. Any attempted assignment made in violation of this provision shall be null and void. Notwithstanding the foregoing, Optionee may assign this Agreement to (i) a wholly-owned subsidiary of Optionee or (ii) to a trust to be established pursuant to guidelines of the United States Bureau of Indian Affairs solely for the benefit of the Jamul Mission Indian Tribe, provided that Optionee gives Owner prior written notice of such assignment and the assignee assumes all of Optionee's obligations under this Agreement in a written assignment and assumption agreement in favor of and acceptable to Owner. 11.2 Bankruptcy. If (a) all or substantially all of Optionee's assets are placed in the hands of a receiver or trustee, and such receivership or trusteeship continues for a period of thirty (30) days, (b) Optionee makes an assignment for the benefit of creditors, (c) Optionee is adjudicated a bankrupt, (d) Optionee institutes any proceeding under any law relating to bankruptcy wherein Optionee seeks to be adjudicated a bankrupt, or to be discharged of its debts, or to effect a plan of liquidation, composition or reorganization, (e) an involuntary proceeding is filed against Optionee under any bankruptcy laws and Optionee consents thereto or acquiesces therein by pleading or default or such involuntary proceeding is not dismissed within ninety (90) days, or (f) substantially all of Optionee's assets are attached or seized by judicial order where such seizure is not discharged within thirty (30) days, then (i) Optionee will be deemed to be in default hereunder, (ii) this Agreement, including, without limitation, the right to purchase granted herein will not become an asset in any of such proceedings, (iii) in addition to all other available remedies, it will be lawful for Owner to declare this Agreement terminated, and (iv) Optionee will have no further claim on the Property or hereunder or 26 otherwise and no right to the return of its Option Payments or any other payments or expenses incurred pursuant to this Agreement. 11.3 Assignment by Owner. Owner may, at any time, assign or otherwise transfer its rights and obligations under this Agreement, provided Owner gives Optionee prior written notice of such assignment and the assignee assumes all of Owner's obligations under this Agreement in a written assignment and assumption agreement in favor of and acceptable to Optionee. Alternatively, Owner shall have the right to assign all of its interest under this Agreement, provided it provides advance written notice to Optionee and Owner is not relieved of any of its obligations under this Agreement during the term hereof or those obligations that survive the Close of Escrow. Article 12 CONDEMNATION 12.1 Eminent Domain. If, prior to the Close of Escrow, all of the Property is taken or appropriated by any public or quasi-public authority under the power of eminent domain or such an eminent domain action is threatened pursuant to a resolution of intention to condemn filed by any public entity, then Optionee may terminate this Agreement without further liability hereunder. If there is a partial taking of the Property or the threatened partial taking pursuant to a resolution of intention to condemn, and if such taking would materially and adversely affect Optionee's ability to develop a gaming casino and related parking facilities, then Optionee may elect to either (a) terminate this Agreement and receive a refund of all of Optionee's Option Payments or (b) purchase the Property without a reduction in the Purchase Price, in which case Owner will assign to Optionee all condemnation proceeds attributable to the condemnation of the Property. The parties acknowledge and agree that any such partial taking of the Property would adversely affect the value of the remaining portion of the Property. 12.2 Condemnation. As used in this Article, "condemnation", or "condemned" or "taking" shall mean the exercise of, or intent to exercise, the power of eminent domain, expressed in writing, as well as the filing of any action or proceeding for such purpose, by any person, entity, body, agency or authority having the right or power of eminent domain (the "condemning authority" herein), and shall include a voluntary sale by Owner to any such condemning authority, either under the threat of condemnation or while condemnation proceedings are pending, and the condemnation shall be deemed to occur in point of time upon the actual physical taking of possession pursuant to the exercise of said power of eminent domain. Article 13 GENERAL PROVISIONS 13.1 Construction of Agreement. The Agreement contained herein shall not be construed in favor of or against either party, but shall be construed as 27 if both parties prepared this Agreement. Optionee and Owner acknowledge that they have been represented, or have had the opportunity to be represented, by counsel of their own choice. Neither Optionee nor Owner is relying upon any legal advice from the other party's counsel regarding the subject matter thereof. Both parties acknowledge that they understand the terms and conditions of this Agreement and the terms and conditions of all other documents and agreements executed in connection herewith and that they sign the same freely. Neither Optionee nor Owner shall deny the enforceability of any provision of this Agreement or any of the other documents or agreements executed in connection herewith on the basis that it did not have legal counsel or that it did not understand any such term or condition. This Agreement and any ambiguities or uncertainties contained in this Agreement shall be equally and fairly interpreted for the benefit of and against all parties to this Agreement and shall further be construed and interpreted without reference to the identity of the party or parties preparing this document, it being expressly understood and agreed that the parties hereto participated equally in the negotiation and preparation of this Agreement or have had equal opportunity to do so. Accordingly, the parties hereby waive the legal effect of California Civil Code Section 1654 or any successor and/or amended statute which in part states that in cases of uncertainty, the language of the contract should be interpreted most strongly against the party who caused the uncertainty to exist. 13.2 Captions. The captions used in this Agreement are for convenience only and are not a part of this Agreement and do not in any way limit or amplify the terms and provisions hereof. 13.3 Governing Law. This Agreement and the documents in the forms attached as exhibits hereto shall be governed by and construed under the internal laws of the State of California without regard to choice of law rules. This Agreement shall be deemed made and entered into in San Diego County. 13.4 Time of the Essence. Time is of the essence of each and every provision of this Agreement and the Optionee, by execution of this Agreement, specifically acknowledges the importance of observing each and every time period in this Agreement. 13.5 Successors and Assigns. Subject to the restrictions and prohibitions on assignment set forth in Article 11, each and all of the covenants and conditions of this Agreement will inure to the benefit of and be binding upon the successors in interest of Owner and the successors, heirs, representatives and assigns of Optionee. As used in this Section, "successors" means successors to the parties' interest in the Property, successors to all or substantially all of the parties' assets, and successors by merger or consolidation. 13.6 Remedies Cumulative. Except as expressly limited by this Agreement, all rights, options and remedies of Owner contained in this Agreement are cumulative, and no one of them is exclusive of the other, and Owner will 28 have the right to pursue any one or all of such remedies or to seek damages or specific performance in the event of any breach of the terms hereof by Optionee or to pursue any other remedy or relief that may be provided by law or equity, whether or not stated in this Agreement. 13.7 Waiver. No waiver by Owner or Optionee of a breach of any of the terms, covenants or conditions of this Agreement by the other party will be construed or held to be a waiver of any succeeding or preceding breach of the same or any other term, covenant or condition herein contained. No waiver of any default by Owner or Optionee under this Agreement will be implied from any omission by the other party to take any action on account of the default if the default persists or is repeated, and no express waiver will affect any default other than as specified in the waiver. The consent or approval by either party to or of any act by the other party requiring consent or approval does not waive or render unnecessary consent or approval to or of any subsequent similar acts. 13.8 Attorney's Fees. If any action, arbitration, judicial reference or other proceeding is instituted between Owner and Optionee in connection with this Agreement, the losing party shall pay to the prevailing party a reasonable sum for attorneys' and experts' fees and costs incurred in bringing or defending such action or proceeding and/or enforcing any judgment granted therein, all of which shall be deemed to have accrued upon the commencement of such action or proceeding and shall be paid whether or not such action or proceeding is prosecuted to final judgment. Any judgment or order entered in such action or proceeding shall contain a specific provision providing for the recovery of attorneys' fees and costs, separate from the judgment, incurred in enforcing such judgment. The prevailing party shall be determined by the trier of fact based upon an assessment of which party's major arguments or positions taken in the proceedings could fairly be said to have prevailed over the other party's major arguments or positions on major disputed issues. For the purposes of this section, attorneys' fees shall include, without limitation, fees incurred in the following: (1) post-judgment motions; (2) contempt proceedings; (3) garnishment, levy, and debtor and third party examinations; (4) discovery; (5) any appeals; and (6) bankruptcy proceedings. This Section is intended to be expressly severable from the other provisions of this Agreement, is intended to survive any judgment and is not to be deemed merged into the judgment. 13.9 Severability. If any phrase, clause, sentence, paragraph, section, article or other portion of this Agreement is held by any court of competent jurisdiction to be illegal, null or void or against public policy, the remaining portions of this Agreement will not be affected thereby and will remain in force and effect to the fullest extent permissible by law. 13.10 Gender and Number. In this Agreement (unless the context requires otherwise), the masculine, feminine and neuter genders and the singular and the plural include one another. 29 13.11 No Real Estate Brokerage Commission. Owner shall not pay any real estate, brokerage, finders or other commission or fee in connection with the transaction contained in this Agreement. Each party hereby indemnifies, protects, defends (with legal counsel acceptable to the other party) and holds the other party free and harmless from and against any and all costs and liabilities, including, without limitation, reasonable attorneys' fees, for causes of action or proceedings that may be instituted by any broker, agent or finder, licensed or otherwise, claiming through, under or by reason of the conduct of such party in connection with this transaction. 13.12 Entire Agreement. This Agreement constitutes the entire agreement between the parties pertaining to the subject matter of this Agreement, and all prior and contemporaneous agreements, representations, negotiations and understandings of the parties, oral or written, are hereby superseded and are of no further force or effect and shall not be used to interpret this Agreement. The foregoing sentence not affect the validity of any instruments executed by the parties in the form of the exhibits attached to this Agreement. 13.13 Notice and Payments. Any notice to be given or other document to be delivered by any party to the other or others under this Agreement, and any payments from Optionee to Owner, may be delivered in person to an officer of any party, or may be deposited in the United States mail in the State of California, duly certified or registered, return receipt requested, with postage prepaid, or by Federal Express or other similar overnight delivery service, or by facsimile, addressed to the party for whom intended, as follows: To Owner at its Otay Land Company, LLC business office: 1903 Wright Place, Suite 220 Carlsbad, CA 92008 Attn: Paul Borden, President Facsimile No.: (760) 918-8200 Telephone No.: (760) 918-8210 With a copy to: Luce, Forward, Hamilton & Scripps LLP 600 West Broadway, Suite 2600 San Diego, CA 92101 Attn: David M. Hymer, Esq. Facsimile No.: (619) 645-5334 Telephone No.: (619) 699-2518 To Optionee at its Lakes Kean Argovitz Resorts-California, LLC business office: c/o Kean Argovitz Resorts 11999 Katy Freeway, Suite 322 Houston, TX 77079 Attn: Jerry Argovitz Facsimile No.: (281) 597-8480 Telephone No.: (281) 597-8779 30 With a copy to: Lakes Gaming, Inc. 130 Chesire Lane Minnetonka, MN 55305 Attn: Timothy Cope Facsimile No.: (612) 449-7064 Telephone No.: (612) 449-9092 With a copy to: Kean Argovitz Resorts 2644 East Lakeshore Drive Baton Rouge, LA 70808 Attn: Kevin Kean Facsimile No.: (225) 388-9119 Telephone No.: (225) 388-9118 With a copy to: Duckor Spradling & Metzger 401 West A Street, Suite 2400 San Diego, CA 92101 Attn: Stephen A. Colley/Gary J. Spradling Facsimile No.: (619) 236-6629 Telephone No.: (619) 231-3666 If to Escrow Chicago Title Company Agent to: 925 "B" Street San Diego, CA 92101 Attn: Shelva Molm Facsimile No.: (619) 544-6250 Telephone No.: (619) 544-6229 Any party may from time to time, by written notice to the other, designate a different address, which shall be substituted for the one above specified. Unless otherwise specifically provided for in this Agreement, all notices, payments, demands or other communications shall be in writing and shall be deemed to have been duly given and received (i) upon personal delivery or (ii) as of the third Business Day after mailing by United States registered or certified mail, return receipt requested, postage prepaid, addressed as set forth above, or (iii) the immediately succeeding Business Day after timely deposit with Federal Express or other equivalent overnight delivery system or (iv) if sent by facsimile, upon confirmation if sent before 5:00 p.m. on a Business Day or otherwise on the Business Day following confirmation of such facsimile, and provided that notice is also sent on the same day by one of the methods described above. 13.14 No Partnership or Joint Venture. Optionee and Owner expressly acknowledge and agree that they are not joint venturers or partners, and do not have fiduciary duties with respect to one another, in any manner whatsoever, in connection with the acquisition, development or conveyance of the Property. Nothing in this Agreement or any communication or other action between the parties relating to the Property, is intended or shall be construed to create a 31 joint venture, partnership or fiduciary relationship between Optionee and Owner or their respective owners. 13.15 Modification. No modification, waiver, amendment, discharge or change of this Agreement shall be valid unless it is in writing and signed by the party against which the enforcement of such modification, waiver, amendment, discharge or change is or may be sought. 13.16 No Warranties. Except as otherwise specifically provided herein, neither Optionee nor Owner has made any representations, warranties or agreement by or on behalf of either party to the other party as to any matters concerning the Property. Each party waives any rights of rescission and all claims for damages or the right to bring a suit for specific performance by reason of any representation, warranty, or agreement, if any, not contained in this Agreement. 13.17 Counterparts. This Agreement may be executed in counterparts, each of which, when taken together, will constitute a fully executed original. 13.18 Exhibits and Schedules. All Exhibits and Schedules attached hereto are incorporated herein by reference. 13.19 Not an Offer. Owner's delivery of unsigned copies of this Agreement is solely for the purpose of review by the party to whom delivered, and neither the delivery nor any prior communications between the parties, whether oral or written, will in any way be construed as an offer by Owner, nor in any way imply that Owner is under any obligation to enter the transaction which is the subject of this Agreement. The signing of this Agreement by Optionee constitutes an offer which will not be deemed accepted by Owner unless and until Owner has signed this Agreement and delivered a duplicate original to Optionee. 13.20 Confidentiality. Unless otherwise agreed to in writing by Owner, Optionee will keep confidential the existence, terms and all other matters relating to this Agreement and all documents, contracts, prices, plans, specifications, strategies, marketing programs, financial statements, reports or other information provided to, or generated by Owner relating to the Property and will not disclose any such information to any person other than (i) those employees and agents of Optionee who are actively and directly participating in the evaluation of the Property, provided that any such disclosure shall be limited to the information needed by such employees and agents to evaluate the Property and any such employees and agents shall agree to maintain the confidentiality of any such information, and (ii) the United States Bureau of Indian Affairs to the extent required to comply with applicable legal requirements. Optionee expressly covenants and agrees that it will not disclose any code compliance, environmental or other regulatory matters to governmental or other authorities without the express prior written approval by Owner unless required by law, in which case Optionee shall immediately notify Owner thereof. Upon any termination of this Agreement for any reason, Optionee will promptly return to Owner copies of all documents or other information pertaining to the 32 Property provided to Optionee by Owner, including, without limitation, the Property Documents. The provisions of this Section will survive the Closing or earlier termination of this Agreement. In addition to any other remedies available to Owner at law or in equity, Owner will have the right to terminate this Agreement in the event of any breach by Optionee under this Section, and Optionee acknowledges that any such breach will be a material breach. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of the date first above-written. OWNER: OPTIONEE: OTAY LAND COMPANY, LLC, a LAKES KEAN ARGOVITZ RESORTS- Delaware limited liability company CALIFORNIA, LLC, a Delaware limited liability company By: /s/ Paul J. Borden ------------------------------ Name: Paul J. Borden By: /s/ Jerry A. Argovitz ---------------------------- ------------------------------ Title: President Name: Jerry A. Argovitz --------------------------- ---------------------------- Title: Director/Member --------------------------- By: /s/ Kevin M. Kean ------------------------------ Name: Kevin M. Kean ---------------------------- Title: President --------------------------- [SIGNATURES OF TWO APPROPRIATE OFFICERS OR BOARD RESOLUTION REQUIRED.] 33 CONSENT OF ESCROW AGENT The undersigned Escrow Agent hereby agrees to (i) accept the foregoing Agreement, (ii) be escrow agent under said Agreement and (iii) be bound by said Agreement in the performance of its duties as escrow agent; provided, however, the undersigned shall have no obligations, liability or responsibility under (i) this Consent or otherwise unless and until said Agreement, fully signed by the parties, has been delivered to the undersigned or (ii) any amendment to said Agreement unless and until the same shall be accepted by the undersigned in writing. DATED: CHICAGO TITLE COMPANY ----------------------- ("Escrow Agent") By: ------------------------------------ Its: -------------------------------- EX-10.18 4 EXHIBIT 10.18 ------------- FIRST AMENDMENT TO OPTION AND PURCHASE AGREEMENT AND ESCROW INSTRUCTIONS This FIRST AMENDMENT TO OPTION AND PURCHASE AGREEMENT AND ESCROW INSTRUCTIONS ("Amendment") is made and effective as of December 8, 1999, by and between OTAY LAND COMPANY, LLC, a Delaware limited liability company ("Owner"), and LAKES KEAN ARGOVITZ RESORTS-CALIFORNIA, LLC, a Delaware limited liability company ("Optionee"), with reference to the facts set forth below. RECITALS A. Owner and Optionee entered into an Option and Purchase Agreement and Escrow Instructions dated as of October 18, 1999 (the "Option Agreement"), with respect to approximately eighty six (86) acres located in the County of San Diego, California as more particularly described in the Option Agreement. B. The parties desire to amend the Option Agreement on the terms and conditions set forth below. NOW, THEREFORE, in consideration of the recitals set forth above, the mutual agreements set forth herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as set forth below. 1. Defined Terms. All terms with initial capital letters used herein but not otherwise defined shall have the respective meanings set forth in the Option Agreement. 2. Agreement Upon Road Alignment. Sections 4.2.3 and 4.3.2 of the Option Agreement are hereby deleted in their entirety. Upon the Close of Escrow, Owner will reserve in the Grant Deed a road easement in the location depicted in Exhibit "A-1" attached to the Option Agreement (the "Road Alignment"). The road easement will be exclusive except that Optionee may use the road easement for purposes that do not interfere with the use of the road by Owner and its invitees, successors and assigns and, if the road becomes a public road, such easement shall be exclusive except to the extent the County of San Diego, allows other uses. Owner will have the right to construct the road within the road easement, at no expense to Optionee (except that Optionee will be responsible for any improvements that provide access to the Property and any other cost to accommodate Optionee's use or development of the Property), to County of San Diego requirements and specifications and shall reserve in the Grant Deed an easement for road, utility and related purposes, including the right to construct, install, repair, maintain and replace the road and related utilities, including a temporary easement for access and construction purposes over portions of the Property adjacent to the road area. In addition, Optionee agrees that Owner shall have the right to require Optionee to convey a new road easement within the Road Alignment or fee title to the property within the Road Alignment to the County for road purposes, in which case, for no additional NY2:\891108\01\76830.0194 consideration, Optionee will promptly execute and deliver any documents reasonably necessary to effect such conveyance. Optionee shall have the right to effectively relocate the road easement and the Road Alignment to another location within the Property so long as (i) Optionee gives written notice to Owner of such election prior to the earlier of the date Owner and its consultants begin preparing improvement plans for the road or ten (10) Business Days prior to the Close of Escrow, and, (ii) the new location of the road easement and the Road Alignment is sufficient for construction of a public road in accordance with County of San Diego, requirements and specifications. In such event, the description of the road easement reserved in the Grant Deed will be revised and Optionee agrees to execute and deliver to Owner any other documents necessary to convey the road easement over the real property within the new location of the Road Alignment to Owner. After the Close of Escrow, Optionee will have no right to relocate the road easement. 3. Miscellaneous. This Amendment may be executed in counterparts, each of which, taken together, shall constitute one fully executed original. Except as expressly modified by this Amendment, the Option Agreement shall remain in full force and effect. IN WITNESS WHEREOF, the parties have executed this Amendment as of the date set forth above. OWNER: OPTIONEE: OTAY LAND COMPANY, LLC, a LAKES KEAN ARGOVITZ RESORTS- Delaware limited liability company CALIFORNIA, LLC, a Delaware limited liability company By: /s/ Paul J. Borden ------------------------------ Name: Paul J. Borden By: /s/ Jerry A. Argovitz ---------------------------- ------------------------------ Title: President Name: Jerry A. Argovitz --------------------------- ---------------------------- Title: Member --------------------------- By: -------------------------- Name: ------------------------ Title: ----------------------- 2 EX-10.19 5 EXHIBIT 10.19 ------------- SECOND AMENDMENT TO OPTION AND PURCHASE AGREEMENT AND ESCROW INSTRUCTIONS This SECOND AMENDMENT TO OPTION AND PURCHASE AGREEMENT AND ESCROW INSTRUCTIONS ("Amendment") is made and effective as of December 14, 1999, by and between OTAY LAND COMPANY, LLC, a Delaware limited liability company ("Owner"), and LAKES KEAN ARGOVITZ RESORTS-CALIFORNIA, LLC, a Delaware limited liability company ("Optionee"), with reference to the facts set forth below. RECITALS A. Owner and Optionee entered into an Option and Purchase Agreement and Escrow Instructions dated as of October 18, 1999, as amended on December 8, 1999 (the "Option Agreement"), with respect to approximately eighty six (86) acres located in the County of San Diego, California as more particularly described in the Option Agreement. B. The parties desire to amend the Option Agreement on the terms and conditions set forth below. NOW, THEREFORE, in consideration of the recitals set forth above, the mutual agreements set forth herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as set forth below. 1. Defined Terms. All terms with initial capital letters used herein but not otherwise defined shall have the respective meanings set forth in the Option Agreement. 2. Mitigation Property. Excluding the Property, Owner owns approximately 3,278 acres located adjacent to or in the vicinity of the Property in the area known as Proctor Valley within the County of San Diego County. Portions of such property are designated as mitigation property (the "Mitigation Property") under the Otay Ranch Phase 2 Resource Management Plan. Optionee has advised Owner that Optionee intends to develop approximately forty (40) acres within the Property (the "Development Property"). Owner agrees to allocate to Optionee , for no additional consideration, up to five (5) acres of Mitigation Property as necessary to mitigate the impacts of development of the Development Property on certain endangered or threatened species or habitats. Such allocation will be made by recordation of a conservation easement over such Mitigation Property or by another method acceptable to the applicable Governmental Agencies. In addition, subject to availability, Owner agrees to allocate to Optionee additional Mitigation Property ("Additional Mitigation Property") necessary to mitigate such impacts of development of the Development Property in exchange for payment from Optionee to Owner, in Cash, of an amount equal to Ten Thousand Dollars ($10,000) per acre. Prior to the Close of Escrow, Optionee will notify Owner in writing of the amount of Mitigation Property Optionee desires to have allocated to the Development Property. Optionee acknowledges that Owner has the right to continue to market the Mitigation Property for allocation to other parties and that Owner makes no representations that any Additional Mitigation Property will be available to Optionee. NY2:\890624\01\76830.0194 3. Miscellaneous. This Amendment may be executed in counterparts, each of which, taken together, shall constitute one fully executed original. Except as expressly modified by this Amendment, the Option Agreement shall remain in full force and effect. IN WITNESS WHEREOF, the parties have executed this Amendment as of the date set forth above. OWNER: OPTIONEE: OTAY LAND COMPANY, LLC, a LAKES KEAN ARGOVITZ RESORTS- Delaware limited liability company CALIFORNIA, LLC, a Delaware limited liability company By: /s/ Paul J. Borden ------------------------------ Name: Paul J. Borden By: /s/ Jerry A. Argovitz ---------------------------- ------------------------------ Title: President Name: Jerry A. Argovitz --------------------------- ---------------------------- Title: Member --------------------------- By: ------------------------------ Name: ---------------------------- Title: --------------------------- 2 EX-21 6 Exhibit 21 HomeFed Corporation Subsidiaries as of December 31, 1999 Name State of Incorporation/Organization HomeFed Communities, Inc California HomeFed Resources Corporation California Paradise Valley, LLC Delaware Otay Land Company, LLC Delaware NY2:\892787\01\76830.0194 EX-27 7
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS INCLUDED IN THE ACCOMPANYING FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1999 DEC-31-1999 2,795 0 0 0 0 0 0 0 27,528 0 20,552 0 0 566 (7,673) 27,528 2,600 2,859 2,636 2,636 3,653 365 2,404 (6,978) 24 (7,002) 0 0 0 (7,282) (.22) (.22)
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