-----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, B0vcqVFvAIf0iX/TOcmneE7imaGe2wepTBL+8kN1Imp1rL4P0foaH9omr7nujoXL qyTHn4LVky4AF8JpTiND6w== 0000096223-03-000045.txt : 20030522 0000096223-03-000045.hdr.sgml : 20030522 20030522162101 ACCESSION NUMBER: 0000096223-03-000045 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030522 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-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-10153 FILM NUMBER: 03716508 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-K/A 1 hfc10k2002a.txt HOMEFED CORPORATION 2002 10-K/A SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A Amendment No. 2 [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2002 Or [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to___________ Commission file number: 1-10153 HOMEFED CORPORATION ----------------------------------------------------- (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]. Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [ ] No [x] Based on the average bid and asked prices of the Registrant's Common Stock as published by the OTC Bulletin Board Service as of June 30, 2002, the aggregate market value of the Registrant's Common Stock held by non-affiliates was approximately $36,783,000 on that date. As of March 14, 2003, there were 81,550,844 outstanding shares of the Registrant's Common Stock, par value $.01 per share. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's definitive proxy statement, to be filed with the Commission for use in connection with the 2003 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K. ================================================================================ 1 EXPLANATORY NOTE This Report on Form 10-K/A amends and restates the following items in their entirety of the Annual Report on Form 10-K of HomeFed Corproation for the fiscal year ended December 31, 2002. The purpose of this amendment is to: (1) reflect in the balance sheet the increase in number of shares authorized from 100 million to 250 million, effective July 2002 and (2) correct non-material information in Item 12 (Security Ownership of Certain Beneficial Owners and Management). There are no other changes to the information as originally filed. 2 PART II Item 8. Financial Statements and Supplementary Data. - ------- -------------------------------------------- Financial Statements and supplementary data required by this Item 8 are set forth at the pages indicated in Item 15(a) below. PART III Item 12. Security Ownership of Certain Beneficial Owners and Management. - ------- -------------------------------------------------------------- Set forth below is certain information as of April 11, 2003 with respect to the beneficial ownership determined in accordance with Rule 13d-3 under the Securities Exchange act of 1934, as amended, of Common Stock by (i) each person who, to the knowledge of the Company, is the beneficial owner of more than 5% of the outstanding Common Stock (the Company's only class of voting securities), (ii) each Director, (iii) the current executive officers named in the Summary Compensation Table under "Executive Compensation," (iv) the Steinberg Children Trusts and private charitable foundations established by Mr. Cumming and Mr. Steinberg and (v) all executive officers and Directors of the Company as a group.
Number of Shares Name and Address and Nature of Percent of Beneficial Owner Beneficial Ownership of Class - ------------------- -------------------- -------- Leucadia National Corporation (a).................................. 24,742,268 30.3% Patrick D. Bienvenue............................................... 10,750 (b) * Paul J. Borden..................................................... 46,533 (c) * Timothy M. Considine............................................... 15,609 (d) * Ian M. Cumming..................................................... 7,732,364 (e)(f) 9.5% R. Randy Goodson................................................... 791,000 (g) 1.0% Michael A. Lobatz.................................................. 10,750 (b) * Simon G. Malk...................................................... 575,844 (h) .7% Curt R. Noland..................................................... 40,000 (i) * Erin N. Ruhe....................................................... 40,000 (i) * Joseph S. Steinberg................................................ 7,198,130 (f)(j) 8.8% The Steinberg Children Trusts...................................... 893,258 (k) 1.1% Cumming Foundation................................................. 73,297 (l) * The Joseph S. and Diane H. Steinberg 1992 Charitable Trust......................................... 23,815 (m) * All Directors and executive officers as a group (11 persons)......................................... 16,481,980 (n) 19.9%
- ------------------- * Less than .1%. (a) The business address of this beneficial owner is 315 Park Avenue South, New York, New York 10010. (b) Includes 750 common shares that may be acquired upon the exercise of currently exercisable stock options. (c) Includes 30,750 common shares that may be acquired upon the exercise of currently exercisable stock options. (d) Includes 4,859 shares held by the Seeseeanoh Inc. Retirement Plan. Mr. Considine and his wife are the sole owners of Seeseeanoh, a real estate company in San Diego, California. Also includes 8,250 shares held by The Considine Family 1981 Trust, of which Mr. Considine and his wife are trustees. (e) Includes (i) 95,324 shares of Common Stock (.1%) beneficially owned by Mr. Cumming's wife (directly and through trusts for the benefit of Mr. Cumming's children of which Mr. Cumming's wife is trustee) as to which Mr. Cumming may be deemed to be the beneficial owner and (ii) 750 shares that may be acquired upon the exercise of currently exercisable stock options. Does not include 24,742,268 shares held by Leucadia which Mr. Cumming may be deemed to beneficially own as a result of his beneficial ownership of Leucadia common shares. See Item 13, "Certain Relationships and Related Transactions." 3 (f) Messrs. Cumming and Steinberg have an oral agreement pursuant to which they will consult with each other as to the election of a mutually acceptable Board of Directors of the Company. The business address for Messrs. Cumming and Steinberg is c/o Leucadia National Corporation, 315 Park Avenue South, New York, New York 10010. (g) Includes 659,750 common shares that may be acquired upon the exercise of currently exercisable stock options. (h) Includes 355,250 common shares that may be acquired upon the exercise of currently exercisable stock options. (i) Includes 15,000 common shares that may be acquired upon the exercise of currently exercisable stock options. (j) Includes (i) 34,861 shares of Common Stock (less than .1%) beneficially owned by Mr. Steinberg's wife as to which Mr. Steinberg may be deemed to be the beneficial owner and (ii) 750 shares that may be acquired upon the exercise of currently exercisable stock options. Does not include 24,742,268 shares held by Leucadia which Mr. Steinberg may be deemed to beneficially own as a result of his beneficial ownership of Leucadia common shares. See Item 13, "Certain Relationships and Related Transactions." (k) Mr. Steinberg disclaims beneficial ownership of the Common Stock held by the Steinberg Children Trusts. (l) Mr. Cumming is a trustee and President of the foundation and disclaims beneficial ownership of the Common Stock held by the foundation. (m) Mr. Steinberg and his wife are trustees of the trust. Mr. Steinberg disclaims beneficial ownership of the Common Stock held by the trust. (n) Includes 1,084,750 shares of Common Stock that may be acquired upon the exercise of currently exercisable stock options. As of April 11, 2003, Cede & Co. held of record 44,863,093 shares of Common Stock (approximately 55.0% of the total Common Stock outstanding). Cede & Co. held such shares as a nominee for broker-dealer members of The Depository Trust Company, which conducts clearing and settlement operations for securities transactions involving its members. Equity Compensation Plan Information - ------------------------------------ The following table summarizes information regarding the Company's equity compensation plans as of December 31, 2002. All outstanding awards relate to the Company's common stock.
Number of securities remaining available for future issuance Number of Securities Weighted-average under equity to be issued upon exercise price of compensation plans exercise of outstanding options, outstanding options, (excluding securities warrants and rights warrants and rights reflected in column (a)) Plan Category (a) (b) (c) - ------------- ------------------------------- -------------------- ------------------------- Equity compensation plans approved by security holders 1,197,250 $ .63 552,000 Equity compensation plans not approved by security holders -- -- -- --------- ------ ------- Total 1,197,250 $ .63 552,000 ========= ====== =======
4 PART IV Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. - ------- ----------------------------------------------------------------- (a)(1) Financial Statements. Report of Independent Accountants F-1 Consolidated Balance Sheets at December 31, 2002 and 2001 F-2 Consolidated Statements of Operations for the years ended December 31, 2002, 2001 and 2000 F-3 Consolidated Statements of Changes in Stockholders' Equity (Deficit)for the years ended December 31, 2002, 2001 and 2000 F-4 Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000 F-5 Notes to Consolidated Financial Statements F-6 (a)(2) Financial Statement Schedules. Schedules are omitted because they are not required or are not applicable or the required information is shown in the financial statements or notes thereto. (a)(3) Executive Compensation Plans and Arrangements. 1999 Stock Incentive Plan (filed as Annex A to the Company's Proxy Statement dated November 22, 1999). 2000 Stock Incentive Plan (filed as Annex B to the Company's Proxy Statement dated June 20, 2000). (b) Reports on Form 8-K. The Company filed a Current Report on Form 8-K dated October 22, 2002 which set forth information under Item 2. Acquisition of Assets, Item 5. Other Events and Item 7. Financial Statements and Exhibits. (c) Exhibits. 2.1 Amended Disclosure Statement to the Company's Fourth Amended Plan of Reorganization dated July 15, 1994 (incorporated by reference to Exhibit 2.1 to the Company's current report on Form 8-K dated June 14, 1995). 2.2 The Company's Fourth Amended Plan of Reorganization dated July 15, 1994 (incorporated by reference to Exhibit 2.2 to the Company's current report on Form 8-K dated June 14, 1995). 2.3 Order Modifying and Confirming the Company's Fourth Amended Plan of Reorganization dated July 15, 1994 (incorporated by reference to Exhibit 2.3 to the Company's current report on Form 8-K dated June 14, 1995). 3.1 Restated Certificate of Incorporation, as restated July 3, 1995 of the Company (incorporated by reference to Exhibit 3.1 to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 1995). 3.2 By-laws of the Company as amended through December 14, 1999 (incorporated by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999 (the "1999 10-K")). 5 3.3 Amendment to Amended and Restated Bylaws of the Company, dated July 10, 2002 (incorporated by reference to Exhibit 3.3 to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 2002). 3.4 Certificate of Amendment of the Certificate of Incorporation of the Company, dated July 10, 2002 (incorporated by reference to Exhibit 3.4 to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 2002). 10.1 Loan Agreement dated July 3, 1995 between the Company and Leucadia Financial Corporation ("LFC") and Form of 12% Secured Convertible Note due July 3, 2003 (incorporated by reference to Exhibit 10.2 to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 1995). 10.2 Paradise Valley Unit 1 First Closing Purchase Agreement and Escrow Instructions, dated October 3, 1996, between Paradise Valley Communities No. 1 and The Forecast Group (Registered Trade Name), L.P. (incorporated by reference to Exhibit 10.1 to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 1996). 10.3 Paradise Valley Unit 2 First Closing Purchase Agreement and Escrow Instructions, dated October 3, 1996, between Paradise Valley Communities No. 1 and The Forecast Group (Registered Trade Name), L.P. (incorporated by reference to Exhibit 10.2 to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 1996). 10.4 Paradise Valley Unit 1 Second Closing Purchase Agreement and Escrow Instructions, dated October 3, 1996, between Paradise Valley Communities No. 1 and The Forecast Group (Registered Trade Name), L.P. (incorporated by reference to Exhibit 10.3 to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 1996). 10.5 Paradise Valley Unit 2 Second Closing Purchase Agreement and Escrow Instructions, dated October 3, 1996, between Paradise Valley Communities No. 1 and The Forecast Group (Registered Trade Name), L.P. (incorporated by reference to Exhibit 10.4 to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 1996). 10.6 Paradise Valley Unit 3 Option to Purchase Real Property and Escrow Instructions, dated October 3, 1996, between Paradise Valley Communities No. 1 and The Forecast Group (Registered Trade Name), L.P. (incorporated by reference to Exhibit 10.5 to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 1996). 10.7 Paradise Valley Unit 4 Option to Purchase Real Property and Escrow Instructions, dated October 3, 1996, between Paradise Valley Communities No. 1 and The Forecast Group (Registered Trade Name), L.P. (incorporated by reference to Exhibit 10.6 to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 1996). 10.8 Real Estate Purchase Agreement and Escrow Instructions between Southfork Partnership and Northfork Communities (incorporated by reference to Exhibit 10.1 to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 1998). 10.9 Purchase and Sale Agreement and Escrow Instructions, dated as of September 21, 1999, by and between Paradise Valley Communities No. 1 and Western Pacific Housing, Inc. (incorporated by reference to Exhibit 10 to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 1999). 10.10 Amended and Restated Loan Agreement between the Company and LFC, dated as of August 14, 1998 (incorporated by reference to Exhibit 10.2 to the Company's current report on Form 8-K dated August 14, 1998). 6 10.11 Development Management Agreement between the Company and Provence Hills Development Company, LLC, dated as of August 14, 1998 (incorporated by reference to Exhibit 10.3 to the Company's current report on Form 8-K dated August 14, 1998). 10.12 Stock Purchase Agreement between the Company and Leucadia National Corporation, dated as of August 14, 1998 (incorporated by reference to Exhibit 10.1 to the Company's current report on Form 8-K dated August 14, 1998). 10.13 Amended and Restated Limited Liability Company Agreement of Otay Land Company, LLC, dated as of September 20, 1999, between the Company and Leucadia National Corporation (incorporated by reference to Exhibit 10.16 to the Company's Registration Statement on Form S-2 (No. 333-79901) (the "Registration Statement")). 10.14 Stock Purchase Agreement, dated as of October 20, 1998, between the Company and Leucadia National Corporation (incorporated by reference to Exhibit 10.1 to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 1998). 10.15 Administrative Services Agreement, dated as of March 1, 2000, between LFC, the Company, HomeFed Resources Corporation and HomeFed Communities, Inc. (incorporated by reference to Exhibit 10.1 to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 2000). 10.16 Transitional Management Agreement, dated as of August 14, 1998, by and between HomeFed and Accretive Investments, LLC (incorporated by reference to Exhibit 10.17 to the Registration Statement). 10.17 Option and Purchase Agreement and Escrow Instructions, dated as of October 15, 1999, by and between Otay Land Company, LLC and Lakes Kean Argovitz Resorts-California, LLC. (incorporated by reference to Exhibit 10.17 to the 1999 10-K). 10.18 First Amendment to Option and Purchase Agreement and Escrow Instructions, dated as of December 8, 1999, by and between Otay Land Company, LLC and Lakes Kean Argovitz Resorts-California, LLC (incorporated by reference to Exhibit 10.18 to the Company's 1999 10-K). 10.19 Second Amendment to Option and Purchase Agreement and Escrow Instructions, dated as of December 14, 1999, by and between Otay Land Company, LLC and Lakes Kean Argovitz Resorts-California, LLC (incorporated by reference to Exhibit 10.19 to the Company's 1999 10-K). 10.20 Purchase and Sale Agreement and Joint Escrow Instructions, dated as of September 30, 1998, by and between Paradise Valley Communities No. 1 and Richmond American Homes of California, Inc. (incorporated by reference to Exhibit 10.15 to the Registration Statement). 10.21 Amendment No. 1 dated as of November 1, 2000 to the Administrative Services Agreement dated as of March 1, 2000 (incorporated by reference to Exhibit 10.21 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000 (the "2000 10-K")). 10.22 Amendment No. 2 dated as of February 28, 2001 to the Administrative Services Agreement dated as of March 1, 2000 (incorporated by reference to Exhibit 10.22 to the Company's 2000 10-K). 10.23 Line Letter dated as of March 1, 2001 from LFC to the Company (incorporated by reference to Exhibit 10.23 to the Company's 2000 10-K). 10.24 Deferred Compensation Agreement, dated as of March 6, 2000, between the Company and Joseph S. Steinberg (incorporated by reference to Exhibit 10.24 to the Company's Annual Report on Form 10-K/A for the fiscal year ended December 31, 2000). 10.25 Amendment No. 1 dated as of March 1, 2002 to the Line Letter dated as of March 1, 2001 from LFC to the Company (incorporated by reference to Exhibit 10.25 to the Company's Annual Report on Form 10-K/A for the fiscal year ended December 31, 2001). 7 10.26 Amendment No. 3 dated as of December 31, 2001 to the Administrative Services Agreement dated as of March 1, 2000 (incorporated by reference to Exhibit 10.26 to the Company's Annual Report on Form 10-K/A for the fiscal year ended December 31, 2001). 10.27 Third Amendment to Option and Purchase Agreement and Escrow Instructions, dated as of June 21, 2002, by and between Otay Land Company, LLC and Lakes Kean Argovitz Resorts - California, LLC (incorporated by reference to Exhibit 10.27 to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 2002). 10.28 Stock Purchase Agreement dated as of October 21, 2002, by and between HomeFed Corporation and Leucadia National Corporation (incorporated by reference to Exhibit 10.1 to the Company's current report on Form 8-K dated October 22, 2002). 10.29 Registration Rights Agreement dated as of October 21, 2002, by and between HomeFed Corporation and Leucadia National Corporation (incorporated by reference to Exhibit 10.2 to the Company's current report on Form 8-K dated October 22, 2002). 10.30 Second Amendment and Restated Loan Agreement dated as of October 9, 2002, by and between HomeFed Corporation and Leucadia Financial Corporation (incorporated by reference to Exhibit 10.3 to the Company's current report on Form 8-K dated October 22, 2002). 10.31 Second Amendment and Restated Variable Rate Secured Note dated as of October 9, 2002 (incorporated by reference to Exhibit 10.4 to the Company's current report on Form 8-K dated October 22, 2002). 10.32 Amended and Restated Line Letter dated as of October 9, 2002, by and between HomeFed Corporation and Leucadia Financial Corporation (incorporated by reference to Exhibit 10.5 to the Company's current report on Form 8-K dated October 22, 2002). 10.33 Amended and Restated Term Note dated as of October 9, 2002 (incorporated by reference to Exhibit 10.6 to the Company's current report on Form 8-K dated October 22, 2002). 10.34 Amendment No. 4 dated as of May 28, 2002 to the Administrative Services Agreement dated as of March 1, 2000 (previously filed). 10.35 Amendment No. 5 dated as of November 15, 2002 to the Administrative Services Agreement dated as of March 1, 2000 (previously filed). 10.36 Amendment dated as of October 21, 2002 to the Development Management Agreement dated as of August 14, 1998 (previously filed). 10.37 Contribution Agreement between the Company and San Elijo Hills Development Company, LLC, dated as of October 21, 2002 (previously filed). 10.38 Agreement and Guaranty, dated as of October 1, 2002 between Leucadia National Corporation and CDS Holding Corporation (previously filed). 10.39 Obligation agreement, dated as of October 1, 2002, between Leucadia National Corporation and San Elijo Ranch, Inc (previously filed). 21 Subsidiaries of the Company (previously filed). 99.1 Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 8 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this amendment to be signed on its behalf by the undersigned, thereunto duly authorized. HOMEFED CORPORATION Date: May 22, 2003 By /s/ ERIN N. RUHE ----------------------------- Erin N. Ruhe Vice President and Controller 9 CERTIFICATIONS I, Paul J. Borden, certify that: 1. I have reviewed this annual report on Form 10-K/A of HomeFed Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a- 14 and 15d- 14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 22, 2003 By:/s/ Paul J. Borden ------------------- Paul J. Borden President 10 CERTIFICATIONS I, Erin N. Ruhe, certify that: 1. I have reviewed this annual report on Form 10-K/A of HomeFed Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a- 14 and 15d- 14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 22, 2003 By: /s/ Erin N. Ruhe ------------------------------ Erin N. Ruhe Vice President and Controller 11 EXHIBIT INDEX Exhibit Exemption Number Description Indication - ------ ----------- ---------- 2.1 Amended Disclosure Statement to the Company's Fourth Amended Plan of Reorganization dated July 15, 1994 (incorporated by reference to Exhibit 2.1 to the Company's current report on Form 8-K dated June 14, 1995). 2.2 The Company's Fourth Amended Plan of Reorganization dated July 15, 1994 (incorporated by reference to Exhibit 2.2 to the Company's current report on Form 8-K dated June 14, 1995). 2.3 Order Modifying and Confirming the Company's Fourth Amended Plan of Reorganization dated July 15, 1994 (incorporated by reference to Exhibit 2.3 to the Company's current report on Form 8-K dated June 14, 1995). 3.1 Restated Certificate of Incorporation, as restated July 3, 1995 of the Company (incorporated by reference to Exhibit 3.1 to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 1995). 3.2 By-laws of the Company as amended through December 14, 1999 (incorporated by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999 (the "1999 10-K")). 3.3 Amendment to Amended and Restated Bylaws of the Company, dated July 10, 2002 (incorporated by reference to Exhibit 3.3 to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 2002). 3.4 Certificate of Amendment of the Certificate of Incorporation of the Company, dated July 10, 2002 (incorporated by reference to Exhibit 3.4 to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 2002). 10.1 Loan Agreement dated July 3, 1995 between the Company and Leucadia Financial Corporation ("LFC") and Form of 12% Secured Convertible Note due July 3, 2003 (incorporated by reference to Exhibit 10.2 to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 1995). 10.2 Paradise Valley Unit 1 First Closing Purchase Agreement and Escrow Instructions, dated October 3, 1996, between Paradise Valley Communities No. 1 and The Forecast Group (Registered Trade Name), L.P. (incorporated by reference to Exhibit 10.1 to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 1996). 10.3 Paradise Valley Unit 2 First Closing Purchase Agreement and Escrow Instructions, dated October 3, 1996, between Paradise Valley Communities No. 1 and The Forecast Group (Registered Trade Name), L.P. (incorporated by reference to Exhibit 10.2 to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 1996). 10.4 Paradise Valley Unit 1 Second Closing Purchase Agreement and Escrow Instructions, dated October 3, 1996, between Paradise Valley Communities No. 1 and The Forecast Group (Registered Trade Name), L.P. (incorporated by reference to Exhibit 10.3 to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 1996). 10.5 Paradise Valley Unit 2 Second Closing Purchase Agreement and Escrow Instructions, dated October 3, 1996, between Paradise Valley Communities No. 1 and The Forecast Group (Registered Trade Name), L.P. (incorporated by reference to Exhibit 10.4 to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 1996). 12 10.6 Paradise Valley Unit 3 Option to Purchase Real Property and Escrow Instructions, dated October 3, 1996, between Paradise Valley Communities No. 1 and The Forecast Group (Registered Trade Name), L.P. (incorporated by reference to Exhibit 10.5 to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 1996). 10.7 Paradise Valley Unit 4 Option to Purchase Real Property and Escrow Instructions, dated October 3, 1996, between Paradise Valley Communities No. 1 and The Forecast Group (Registered Trade Name), L.P. (incorporated by reference to Exhibit 10.6 to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 1996). 10.8 Real Estate Purchase Agreement and Escrow Instructions between Southfork Partnership and Northfork Communities (incorporated by reference to Exhibit 10.1 to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 1998). 10.9 Purchase and Sale Agreement and Escrow Instructions, dated as of September 21, 1999, by and between Paradise Valley Communities No. 1 and Western Pacific Housing, Inc. (incorporated by reference to Exhibit 10 to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 1999). 10.10 Amended and Restated Loan Agreement between the Company and LFC, dated as of August 14, 1998 (incorporated by reference to Exhibit 10.2 to the Company's current report on Form 8-K dated August 14, 1998). 10.11 Development Management Agreement between the Company and Provence Hills Development Company, LLC, dated as of August 14, 1998 (incorporated by reference to Exhibit 10.3 to the Company's current report on Form 8-K dated August 14, 1998). 10.12 Stock Purchase Agreement between the Company and Leucadia National Corporation, dated as of August 14, 1998 (incorporated by reference to Exhibit 10.1 to the Company's current report on Form 8-K dated August 14, 1998). 10.13 Amended and Restated Limited Liability Company Agreement of Otay Land Company, LLC, dated as of September 20, 1999, between the Company and Leucadia National Corporation (incorporated by reference to Exhibit 10.16 to the Company's Registration Statement on Form S-2 (No. 333-79901) (the "Registration Statement")). 10.14 Stock Purchase Agreement, dated as of October 20, 1998, between the Company and Leucadia National Corporation (incorporated by reference to Exhibit 10.1 to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 1998). 10.15 Administrative Services Agreement, dated as of March 1, 2000, between LFC, the Company, HomeFed Resources Corporation and HomeFed Communities, Inc. (incorporated by reference to Exhibit 10.1 to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 2000). 10.16 Transitional Management Agreement, dated as of August 14, 1998, by and between HomeFed and Accretive Investments, LLC (incorporated by reference to Exhibit 10.17 to the Registration Statement). 10.17 Option and Purchase Agreement and Escrow Instructions, dated as of October 15, 1999, by and between Otay Land Company, LLC and Lakes Kean Argovitz Resorts-California, LLC (incorporated by reference to Exhibit 10.17 to the Company's 1999 10-K). 10.18 First Amendment to Option and Purchase Agreement and Escrow Instructions, dated as of December 8, 1999, by and between Otay Land Company, LLC and Lakes Kean Argovitz Resorts-California, LLC (incorporated by reference to Exhibit 10.18 to the Company's 1999 10-K). 10.19 Second Amendment to Option and Purchase Agreement and Escrow Instructions, dated as of December 14, 1999, by and between Otay Land Company, LLC and Lakes Kean Argovitz Resorts-California, LLC (incorporated by reference to Exhibit 10.19 to the Company's 1999 10-K). 10.20 Purchase and Sale Agreement and Joint Escrow Instructions, dated as of September 30, 1998, by and between Paradise Valley Communities No. 1 and Richmond American Homes of California, Inc. (incorporated by reference to Exhibit 10.15 to the Registration Statement). 10.21 Amendment No. 1 dated as of November 1, 2000 to the Administrative Services Agreement dated as of March 1, 2000 (incorporated by reference to Exhibit 10.21 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000 (the "2000 10-K")). 10.22 Amendment No. 2 dated as of February 28, 2001 to the Administrative Services Agreement dated as of March 1, 2000 (incorporated by reference to Exhibit 10.22 to the Company's 2000 10-K). 13 10.23 Line Letter dated as of March 1, 2001 from LFC to the Company (incorporated by reference to Exhibit 10.23 to the Company's 2000 10-K). 10.24 Deferred Compensation Agreement, dated as of March 6, 2000, between the Company and Joseph S. Steinberg (incorporated by reference to Exhibit 10.24 to the Company's Annual Report on Form 10-K/A for the fiscal year ended December 31, 2000). 10.25 Amendment No. 1 dated as of March 1, 2002 to the Line Letter dated as of March 1, 2001 from LFC to the Company (incorporated by reference to Exhibit 10.25 to the Company's Annual Report on Form 10-K/A for the fiscal year ended December 31, 2001). 10.26 Amendment No. 3 dated as of December 31, 2001 to the Administrative Services Agreement dated as of March 1, 2000 (incorporated by reference to Exhibit 10.26 to the Company's Annual Report on Form 10-K/A for the fiscal year ended December 31, 2001). 10.27 Third Amendment to Option and Purchase Agreement and Escrow Instructions, dated as of June 21, 2002, by and between Otay Land Company, LLC and Lakes Kean Argovitz Resorts - California, LLC (incorporated by reference to Exhibit 10.27 to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 2002). 10.28 Stock Purchase Agreement dated as of October 21, 2002, by and between HomeFed Corporation and Leucadia National Corporation (incorporated by reference to Exhibit 10.1 to the Company's current report on Form 8-K dated October 22, 2002). 10.29 Registration Rights Agreement dated as of October 21, 2002, by and between HomeFed Corporation and Leucadia National Corporation (incorporated by reference to Exhibit 10.2 to the Company's current report on Form 8-K dated October 22, 2002). 10.30 Second Amendment and Restated Loan Agreement dated as of October 9, 2002, by and between HomeFed Corporation and Leucadia Financial Corporation (incorporated by reference to Exhibit 10.3 to the Company's current report on Form 8-K dated October 22, 2002). 10.31 Second Amendment and Restated Variable Rate Secured Note dated as of October 9, 2002 (incorporated by reference to Exhibit 10.4 to the Company's current report on Form 8-K dated October 22, 2002). 10.32 Amended and Restated Line Letter dated as of October 9, 2002, by and between HomeFed Corporation and Leucadia Financial Corporation (incorporated by reference to Exhibit 10.5 to the Company's current report on Form 8-K dated October 22, 2002). 10.33 Amended and Restated Term Note dated as of October 9, 2002 (incorporated by reference to Exhibit 10.6 to the Company's current report on Form 8-K dated October 22, 2002). 10.34 Amendment No. 4 dated as of May 28, 2002 to the Administrative Services Agreement dated as of March 1, 2000 (previously filed). 10.35 Amendment No. 5 dated as of November 15, 2002 to the Administrative Services Agreement dated as of March 1, 2000 (previously filed). 10.36 Amendment dated as of October 21, 2002 to the Development Management Agreement dated as of August 14, 1998 (previously filed). 10.37 Contribution Agreement between the Company and San Elijo Hills Development Company, LLC, dated as of October 21, 2002 (previously filed). 10.38 Agreement and Guaranty, dated as of October 1, 2002, between Leucadia National Corporation and CDS Holding Corporation (previously filed). 10.39 Obligation Agreement, dated as of October 1, 2002, between Leucadia National Corporation and San Elijo Ranch, Inc (previously filed). 21 Subsidiaries of the Company (previously filed). 99.1 Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 14 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of HomeFed Corporation: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, changes in stockholders' equity (deficit) and cash flows, present fairly, in all material respects, the financial position of HomeFed Corporation and Subsidiaries (the "Company") as of December 31, 2002 and 2001, and the results of their operations, changes in stockholders' equity (deficit) and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP New York, New York March 14, 2003 F-1 HOMEFED CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets December 31, 2002 and 2001 (Dollars in thousands, except par value)
2002 2001 ---- ---- ASSETS Real estate $ 31,108 $ 23,890 Cash and cash equivalents 33,601 1,454 Deposits and other assets 1,026 460 Deferred income taxes 44,742 -- Note receivable 6,566 -- --------- --------- TOTAL $ 117,043 $ 25,804 ========= ========= LIABILITIES Note payable to Leucadia Financial Corporation $ 23,628 $ 22,508 Notes payable to trust deed holders 16,704 -- Deferred revenue 32,621 -- Accounts payable and accrued liabilities 6,323 1,711 Liability for environmental remediation 10,816 -- Income taxes payable 2,875 -- Other liabilities 7,294 -- --------- --------- Total liabilities 100,261 24,219 --------- --------- COMMITMENTS AND CONTINGENCIES MINORITY INTEREST 15,132 13,208 --------- --------- STOCKHOLDERS' EQUITY (DEFICIT) Common stock, $.01 par value, 250,000,000 and 100,000,000 shares authorized; 81,550,844 and 56,808,076 shares outstanding 816 568 Additional paid-in capital 379,630 355,377 Deferred compensation pursuant to stock incentive plans (418) (276) Accumulated deficit (378,378) (367,292) --------- --------- Total stockholders' equity (deficit) 1,650 (11,623) --------- --------- TOTAL $ 117,043 $ 25,804 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. F-2 HOMEFED CORPORATION AND SUBSIDIARIES Consolidated Statements of Operations For the years ended December 31, 2002, 2001 and 2000 (In thousands, except per share amounts)
2002 2001 2000 -------- ------- -------- REVENUES Sales of real estate $ 9,259 $ -- $ 1,575 Co-op marketing and advertising fees 1,942 1,028 44 Development management fee income from San Elijo Hills 1,610 4,775 3,464 Income from options on real estate properties 300 720 92 -------- -------- -------- 13,111 6,523 5,175 -------- -------- -------- EXPENSES Cost of sales 2,815 -- 1,544 Provision for environmental remediation 11,160 -- -- Interest expense relating to Leucadia Financial Corporation 2,780 2,646 2,510 General and administrative expenses 5,543 4,179 3,445 Administrative services fees to Leucadia Financial Corporation 120 107 255 -------- -------- -------- 22,418 6,932 7,754 -------- -------- -------- Loss from operations (9,307) (409) (2,579) -------- -------- -------- Other income, net 311 699 162 -------- -------- -------- Income (loss) before income taxes and minority interest (8,996) 290 (2,417) Income tax (provision) benefit (379) (667) 8 -------- -------- -------- Loss before minority interest (9,375) (377) (2,409) Minority interest (1,711) (1,000) (1,000) -------- -------- -------- Net loss $(11,086) $ (1,377) $ (3,409) ======== ======== ======== Basic loss per common share $ (0.18) $ (0.02) $ (0.06) ======== ======== ======== Diluted loss per common share $ (0.18) $ (0.02) $ (0.06) ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-3 HOMEFED CORPORATION AND SUBSIDIARIES Consolidated Statements of Changes in Stockholders' Equity (Deficit) For the years ended December 31, 2002, 2001 and 2000 (Dollars in thousands, except par value)
Deferred Common Compensation Stock Additional Pursuant to Total $.01 Par Paid-in Stock Incentive Accumulated Stockholders' Value Capital Plans Deficit Equity (Deficit) -------- --------- --------------- ----------- ---------------- Balance, January 1, 2000 $ 566 $354,833 $(362,506) $ (7,107) Issuance of 250,000 shares of Common Stock related to restricted stock grants 2 186 $(188) -- Amortization of restricted stock grants 51 51 Grant of 25,000 stock options 18 (18) -- Grant of 1,000,000 stock options 240 (240) -- Amortization related to stock options 44 44 Net loss (3,409) (3,409) ------ -------- ----- --------- -------- Balance, December 31, 2000 568 355,277 (351) (365,915) (10,421) Amortization of restricted stock grants 63 63 Amortization related to stock options 112 112 Change in value of performance-based stock options 100 (100) -- Net loss (1,377) (1,377) ------ -------- ----- --------- -------- Balance, December 31, 2001 568 355,377 (276) (367,292) (11,623) Issuance of 24,742,268 shares of Common Stock 248 23,752 24,000 Amortization of restricted stock grants 63 63 Amortization related to stock options 295 295 Change in value of performance-based stock options 500 (500) -- Exercise of options to purchase Common Shares 1 1 Net loss (11,086) (11,086) ------ -------- ----- --------- -------- Balance, December 31, 2002 $ 816 $379,630 $(418) $(378,378) $ 1,650 ====== ======== ===== ========= ========
The accompanying notes are an integral part of these consolidated financial statements. F-4 HOMEFED CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows For the years ended December 31, 2002, 2001 and 2000 (In thousands)
2002 2001 2000 -------- ------- ------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(11,086) $(1,377) $(3,409) Adjustments to reconcile net loss to net cash provided by (used for) operating activities: Minority interest 1,711 1,000 1,000 Provision for deferred income taxes 363 -- -- Provision for environmental remediation 11,160 -- -- Amortization of deferred compensation pursuant to stock incentive plans 358 175 95 Amortization of debt discount on note payable to Leucadia Financial Corporation 1,120 1,034 922 Changes in operating assets and liabilities: Real estate (6,855) (911) 728 Deposits and other assets 169 (252) (50) Note receivable (6,566) -- -- Liability for environmental remediation (344) -- -- Recreation center liability -- (41) (929) Deferred revenue 19,792 -- -- Accounts payable and accrued liabilities 183 195 (389) Income taxes payable 286 -- -- Other liabilities 6,480 -- -- Increase in restricted cash -- -- 868 -------- -------- -------- Net cash provided by (used for) operating activities 16,771 (177) (1,164) -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of CDS, net of cash acquired 18,979 -- -- -------- -------- -------- Net cash provided by investing activities 18,979 -- -- -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings under credit agreement with Leucadia Financial Corporation 2,150 900 -- Payments related to credit agreement with Leucadia Financial Corporation (2,150) (900) -- Distribution to minority interest (2,524) -- -- Payments to trust deed note holders (1,080) -- -- Exercise of options to purchase common shares 1 -- -- -------- -------- -------- Net cash used for financing activities (3,603) -- -- -------- -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 32,147 (177) (1,164) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,454 1,631 2,795 -------- -------- -------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 33,601 $ 1,454 $ 1,631 ======== ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest $ 1,660 $ 1,612 $ 1,588 ======== ======== ======== Cash paid (refunded) for income taxes $ (279) $ 668 $ (16) ======== ======== ======== NON-CASH INVESTING ACTIVITIES: Common stock issued for acquisition of CDS $ 24,000 $ -- $ -- ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-5 HOMEFED CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation - The accompanying consolidated financial statements include the accounts of HomeFed Corporation (the "Company"), Otay Land Company, LLC ("Otay Land Company") and the Company's wholly-owned subsidiaries, HomeFed Communities, Inc., HomeFed Resources Corporation and, since its acquisition in October 2002, CDS Holding Corporation and its majority owned subsidiaries ("CDS"). The Company is engaged, directly and through its subsidiaries, in the investment in and development of residential real estate properties in the state of California. All significant intercompany balances and transactions have been eliminated in consolidation. The Company's business, real estate development, is highly competitive, and there are numerous residential real estate developers and development projects operating in the same geographic area in which the Company operates. In addition, the residential real estate development industry is subject to increasing environmental, building, zoning and real estate regulations that are imposed by various federal, state and local authorities. Timing of the initiation and completion of development projects depends upon receipt of necessary authorizations and approvals. Furthermore, changes in prevailing local circumstances or applicable laws may require additional approvals, or modifications of approvals previously obtained. Delays could adversely affect the Company's ability to complete its projects, significantly increase the costs of doing so or drive potential customers to purchase competitors' products. Environmental laws may cause the Company to incur substantial compliance, mitigation and other costs, may restrict or prohibit development in certain areas and may delay completion of the Company's development projects. Delays arising from compliance with environmental laws and regulations could adversely affect the Company's ability to complete its projects, significantly increase the costs of doing so or cause potential customers to purchase competitors' products. The Company's business may also be adversely affected by inflation and is interest-rate sensitive. Certain amounts for prior periods have been reclassified to be consistent with the 2002 presentation. Critical Accounting Policies and Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires the Company to make estimates and assumptions that affect the reported amounts in the financial statements and disclosures of contingent assets and liabilities. On an on-going basis, the Company evaluates all of these estimates and assumptions. Actual results could differ from those estimates. Acquisition Accounting of CDS - In order to determine the book values of the acquired assets and liabilities, generally accepted accounting principles require an initial allocation of the purchase price among CDS's individual assets and liabilities to be based upon their relative fair values at the date of acquisition, which were primarily determined based upon independent third-party appraisals. Further, since the Company believes that the acquisition of CDS will enable it to generate taxable income that will be offset by some of the Company's net operating loss carryforwards ("NOLs"), it must record a deferred tax asset in the purchase price allocation. If the aggregate fair values of the net assets acquired exceed the purchase price, as was the case with CDS, generally accepted accounting principles require that the excess be applied to reduce the fair values of certain non-current assets, but not to reduce the deferred tax asset. As a result of the application of these rules, at the date of acquisition the purchase price was primarily allocated to cash and cash equivalents of approximately $20,000,000, the deferred tax asset of approximately $45,100,000, and only immaterial amounts were allocated to non-current assets, including real estate. The deferred tax asset recognized represents the tax effect of the NOLs that the Company expects to use to offset its future taxable income and the tax effect of the difference between the book and tax bases of CDS's assets and liabilities. F-6 The amount recorded as a deferred tax asset was based on forecasted taxable income of approximately $160,000,000. This estimate was based upon numerous assumptions about the future, including future market conditions where the Company's projects are located, regulatory requirements, estimates of future real estate revenues and development costs, the ability of the Company to realize taxable profits prior to the expiration of its NOLs, future interest expense, operating and overhead costs and other factors. In addition, the calculation of the deferred tax asset also recognizes that a substantial majority of the Company's NOLs will not be available to offset alternative minimum taxable income, which is currently taxed at a federal tax rate of 20%. To the extent the Company's actual taxable income in the future exceeds its estimate, the Company will recognize additional tax benefits; conversely, if the actual taxable income is less than the amounts projected, an addition to the valuation allowance would be recorded that would increase tax expense. Profit Recognition on Sales of Real Estate - Profit from the sale of real estate is recognized in full at the time title is conveyed to the buyer if the profit is determinable, collectibility of the sales price is reasonably assured (demonstrated by meeting minimum down payment and continuing investment requirements), and the earnings process is virtually complete, such that the seller is not obligated to perform significant activities after the sale and has transferred to the buyer the usual risks and rewards of ownership. When it is determined that all the conditions for full profit recognition have not been met, revenue and profit is deferred using the deposit, installment, cost recovery or percentage of completion method of accounting, as appropriate depending upon the specific terms of the transaction. Determining the amount of revenue and profit to be deferred when the Company remains obligated to perform significant activities after the sale requires an estimate of the cost of those future activities, and an allocation of the profit to be recognized between performance at the date of the sale and when the future activities are completed. The Company believes it can reasonably estimate its future costs and profit allocation, however, such estimates are based on numerous assumptions and require management's judgment. Actual costs that are higher or lower than the Company's estimates will impact its recognition of profit in the future. Provision for Losses on Real Estate - The Company's real estate is carried at the lower of cost or fair value less costs to sell. Management periodically assesses the recoverability of its real estate investments by comparing the carrying amount with their fair value less costs to sell. The process involved in the determination of fair value requires estimates as to future events and market conditions. This estimation process assumes the Company has the ability to complete development and dispose of its real estate properties in the ordinary course of business based on management's present plans and intentions. When management determines that the carrying value of specific real estate investments should be reduced to properly record these assets at fair value less costs to sell, this write-down is recorded as a charge to current period operations. The provisions are based on estimates and the ultimate loss may differ from those estimates. Income Taxes - The Company records a valuation allowance to reduce its deferred tax asset to an amount that the Company expects is more likely than not to be realized. If the Company's estimate of the realizability of its deferred tax asset changes in the future, an adjustment to increase or decrease income would be recorded in such period. The valuation allowance is determined after considering all relevant facts and circumstances, but is significantly influenced by the Company's projection of taxable income in the future. Since any projection of future profitability is inherently unreliable, changes in the valuation allowance should be expected. Provision for Environmental Remediation - The Company records environmental liabilities when it is probable that a liability has been incurred and the amount or range of the liability is reasonably estimable. The Company has obtained a preliminary remediation study concerning 34 acres of undeveloped land owned by Otay Land Company. The need for remediation results from activities conducted on the land prior to the Company's ownership. Based upon the preliminary findings of this study, the Company has estimated that the cost to implement the most likely remediation alternative would be approximately $11,200,000. The Company accrued that amount as an operating expense in 2002. The estimated liability is neither discounted nor reduced for potential claims for recovery from previous owners and users of the land who may be liable, and may increase or decrease based upon the actual extent and nature of the remediation required, the type of remedial process approved, the expenses of the regulatory process, inflation and other items. The Company is under no immediate obligation to commence remediation. The Company is currently interviewing various environmental specialists and evaluating alternative remediation processes which may impact the total cost. Although this estimated liability is the Company's current best estimate, no assurance can be given that the actual amount of environmental liability will not exceed the amount of reserves for this matter or that it will not have a material adverse effect on the Company's financial position, results of operations or cash flows. F-7 Real Estate - Real estate, which consists of land held for development and sale, includes all expenditures incurred in connection with the acquisition, development and construction of the property, including interest and property taxes. Land costs are allocated to lots based on relative fair values prior to development and are charged to cost of sales at the time of sale. Cash and Cash Equivalents - Cash equivalents are money market accounts and short-term, highly liquid investments that are readily convertible to cash. Recognition of Fee Income - The Company receives co-op marketing and advertising fees from the San Elijo Hills project that are paid at the time builders sell homes, are generally based upon a fixed percentage of the homes' selling price, and are recorded as revenue when the home is sold. Prior to its acquisition of CDS, the Company recognized fee income for field overhead and management services from the San Elijo Hills project when contractually earned. Capitalization of Interest and Real Estate Taxes - Interest and real estate taxes attributable to land and property construction are capitalized and added to the cost of those properties while the properties are being actively developed. Stock-Based Compensation - Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation", ("SFAS 123"), establishes a fair value method for accounting for stock-based compensation plans, either through recognition in the statements of operations or disclosure. As permitted, the Company applies APB Opinion No. 25 and related Interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized in the statements of operations related to employees and directors under its stock compensation plans. Had compensation cost for the Company's fixed stock options been recorded in the statements of operations consistent with the provisions of SFAS 123, the Company's net loss and loss per share would not have been materially different from that reported in 2002, 2001 and 2000. Recently Issued Accounting Standards - In July 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"), which is effective for exit or disposal activities initiated after December 31, 2002. SFAS 146 addresses issues regarding the recognition, measurement and reporting of costs associated with exit and disposal activities, including restructuring activities. SFAS 146 requires a liability be recognized at fair value for costs associated with exit or disposal activities only when the liability is incurred as opposed to at the time the Company commits to an exit plan as permitted under Emerging Issues Task Force Issue No. 94-3. In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"), which requires a guarantor for certain guarantees to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and initial measurement provisions of FIN 45 are applied on a prospective basis to guarantees issued or modified after December 31, 2002. In addition, FIN 45 modified the disclosure requirements for such guarantees effective for interim or annual periods ending after December 15, 2002. In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"), which addresses consolidation of variable interest entities, which are entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. FIN 46 applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. FIN 46 may be applied prospectively with a cumulative-effect adjustment as of the date on which it is first applied or by restating previously issued financial statements with a cumulative-effect adjustment as of the beginning of the first year restated. The Company does not currently expect that the implementation of these standards will have a material effect on the Company's consolidated results of operations or financial condition. F-8 2. ACQUISITION On October 21, 2002, the Company purchased from Leucadia National Corporation ("Leucadia") all of the issued and outstanding shares of capital stock of CDS which, through its majority-owned indirect subsidiary, San Elijo Hills Development Company, LLC ("San Elijo"), is the owner of the San Elijo Hills project, a master-planned community located in the City of San Marcos, in San Diego County, California. Since August 1998, the Company has been the development manager for the San Elijo Hills project, for which it was entitled to participate in the net cash flow of the project through the payment of a success fee, and receive fees for the field overhead, management and marketing services it provides, based on the revenues of the project. No success fee had been paid prior to the Company's acquisition of CDS. The purchase price of $25,000,000 consisted of $1,000,000 in cash and 24,742,268 shares of the Company's common stock, which represents approximately 30.3% of the Company's outstanding common shares. Prior to the acquisition, Leucadia had also committed to continue to provide to San Elijo project improvement bonds which are required prior to the commencement of any project development. The results of CDS have been included in the Company's consolidated results of operations from the date of acquisition. The acquisition balance sheet of CDS is as follows (in thousands): Assets: - ------- Real estate $ 139 Cash and cash equivalents 19,979 Investments 275 Deposits and other assets 460 Deferred income taxes 45,105 ------- Total assets acquired 65,958 ------- Liabilities: - ------------ Notes payable to trust deed holders 17,560 Deferred revenue 12,829 Accounts payable and accrued liabilities 4,429 Other liabilities 3,403 ------- Total liabilities assumed 38,221 ------- Minority Interest 2,737 ------- Purchase Price $25,000 ======= The following unaudited pro forma financial information presents results for the years ended December 31, 2002 and 2001 as if the acquisition had occurred at the beginning of the respective periods (in thousands, except per share amounts): 2002 2001 ---- ---- Sales of real estate $33,920 $80,721 Total revenues $36,162 $82,469 Income (loss) from operations $(2,441) $26,139 Minority interest $(2,124) $(3,337) Net income (loss) $(3,110) $14,505 Basic earnings (loss) per common share $ (.04) $ .18 Diluted earnings (loss) per common share $ (.04) $ .18 The unaudited pro forma financial information is provided for informational purposes only and is not necessarily indicative of either the Company's operating results that would have occurred had the acquisition been consummated at the beginning of the respective periods, or of the Company's future operating results. F-9 3. REAL ESTATE A summary of real estate by project is as follows (in thousands): December 31, ----------------------- 2002 2001 ---- ---- Otay Ranch $23,856 $22,823 San Elijo Hills 6,023 -- Paradise Valley 1,229 1,067 ------- ------- Total $31,108 $23,890 ======= ======= Interest totaling $224,000, related to the San Elijo Hills project, was incurred and capitalized in real estate during 2002. No interest was capitalized during 2001. All of the San Elijo Hills project land is pledged as collateral for the notes payable to trust deed holders described in Note 5, below. 4. NOTE RECEIVABLE In December 2002, CDS sold 92 residential sites at the San Elijo Hills project to a home builder for net proceeds of $23,657,000, consisting of cash of $17,091,000 and a non-interest bearing note receivable in the amount of $6,566,000. The note matures upon the completion of certain improvements to the property, but cannot exceed one year. The note is secured by a first trust deed on the property. 5. INDEBTEDNESS As of August 14, 1998, the Company and Leucadia Financial Corporation ("LFC"), a subsidiary of Leucadia, entered into an Amended and Restated Loan Agreement pursuant to which the Company and LFC amended the original loan agreement dated July 3, 1995 and restructured the Company's outstanding 12% Secured Convertible Note due 2003 ("Convertible Note") held by LFC. The restructured note dated August 14, 1998 (the "Restructured Note") has a principal amount of $26,462,000, extended the maturity date from July 3, 2003 to December 31, 2004, reduced the interest rate from 12% to 6% and eliminated the convertibility feature of the Convertible Note. The Restructured Note is collateralized by a security interest in all assets of the borrower, whether now owned or hereafter acquired. No principal payments are due under the Restructured Note until its maturity date. On October 9, 2002, the maturity date of this note was extended from December 31, 2004 to December 31, 2007 and the interest rate was increased to 9% for 2005, 10% for 2006 and 11% for 2007. The effective interest rate for the year ended December 31, 2002 was 11.8%. In connection with these amendments, the Company paid LFC a $250,000 fee. As a result of the restructuring of the Convertible Note, the Restructured Note was recorded at fair value and the approximate $7,015,000 difference between the fair value of the Restructured Note and the carrying value of the Convertible Note was reflected as additional paid-in capital. This difference will be amortized as interest expense based on the expected retirement date, December 31, 2005, using the interest method. Approximately $1,120,000, $1,034,000 and $922,000 was amortized to interest expense during 2002, 2001 and 2000, respectively. Additional interest of $1,588,000 was expensed and paid during each of the years in the three year period ended December 31, 2002. In March 2001, the Company entered into a $3,000,000 line of credit agreement with LFC. Loans outstanding under this line of credit bear interest at 10% per annum. Effective March 1, 2002, this agreement was amended to extend the maturity to February 28, 2007, although LFC had the right to terminate the line of credit on an annual basis. On October 9, 2002, the line of credit was increased from $3,000,000 to $10,000,000 and LFC's ability to terminate the line of credit prior to maturity was removed, unless the Company is in default. At December 31, 2002 and 2001, no amounts were outstanding under this facility. Interest on the line of credit of approximately $72,000 and $24,000 was expensed during the years ended December 31, 2002 and 2001, respectively. F-10 Notes payable to trust deed holders consist of non-recourse promissory notes that mature on December 31, 2010, are non-interest bearing and are collateralized by the San Elijo Hills project land. When a portion of the San Elijo Hills project is sold, a specified amount is required to be paid to the note holder in order to obtain a release of their security interest in the land. Such amount is specified in the note agreements and takes into consideration prior note payments. In addition, depending upon the amount of payments made to release their security interest for prior sales, the notes may require minimum annual payments. The minimum annual payments are currently $298,000 for annual periods subsequent to 2003. The sum of all payments made under these notes, whether denominated as interest, principal or otherwise, cannot exceed approximately $42,100,000. As of December 31, 2002, $21,398,000 of payments have been made. The notes payable to trust deed holders were recorded at fair value at the date of acquisition of CDS, based on the estimated future payments discounted at 6.5%. The activity for the period from date of acquisition through December 31, 2002 is as follows (in thousands): Balance at acquisition $17,560 Principal payments (1,080) Interest added to principal 224 ------- Balance at December 31, 2002 $16,704 ======= At the end of each reporting period, the carrying amounts of the notes are compared to the most recent estimate of future payments. The difference is amortized prospectively using the effective interest rate method. The effective interest rate for the period from the date of acquisition through December 31, 2002 was 6.5%. Effective January 1, 2003, the effective interest rate was 8.8%. Based on the Company's cash flow forecast, the expected payments to the trust deed holders that will be allocated to principal are as follows (in thousands): 2003 - $3,971; 2004 - $700; 2005 - $5,599; 2006 - $5,215; and 2007 - $1,219. 6. MINORITY INTEREST Through its ownership of CDS, the Company owns 80% of the common stock of CDS Devco, Inc. ("Devco"), which in turns owns 85% of the common stock of San Elijo Ranch, Inc., ("SERI"). Pursuant to a stockholders' agreement with the holder of the minority interest in Devco, the Company is entitled to a 15% return on all funds advanced to Devco, compounded annually, plus the return of its capital (an aggregate of $25,767,000 as of December 31, 2002), prior to the payment of any amounts to the minority shareholder. Once those amounts have been paid, the minority shareholder is entitled to 20% of future cash flows, if any, distributed to shareholders. As of December 31, 2002, no amounts have been accrued for the Devco minority interest. Pursuant to a stockholders' agreement with the holders of the minority interests in SERI, Devco loans funds to SERI and charges a 12% annual rate. Once this loan is fully repaid ($105,000 due as of December 31, 2002), the minority shareholders of SERI are entitled to 15% of future cash flows, if any, distributed to shareholders. As of December 31, 2002, $3,448,000 has been accrued for the SERI minority interest. The minority shareholders of SERI are also the holders of the notes related to the trust deeds discussed in Note 5, above. As of December 31, 2002 and 2001, $11,684,000 and $13,208,000, respectively, have been accrued with respect to Leucadia's preferred capital interest and cumulative preferred return relating to Otay Land Company, as discussed in Note 12, below. F-11 7. STOCK INCENTIVE PLANS Under the Company's 1999 Stock Incentive Plan (the "Plan"), the Company may grant options, stock appreciation rights and restricted stock to non-employee directors, certain non-employees and employees up to a maximum grant of 300,000 shares to any individual in a given taxable year. Pursuant to the plan, each director of the Company is automatically granted options to purchase 1,000 shares on the date on which the annual meeting of stockholders is held. The maximum number of Common Shares which may be acquired through the exercise of options or rights under the Plan cannot exceed, in the aggregate, 750,000; the maximum number of Common Shares that may be awarded as restricted stock cannot exceed, in the aggregate, 250,000. The Plan provides for the issuance of options and rights at not less than 100% of the fair market value of the underlying stock at the date of grant. Options generally become exercisable in five equal instalments starting one year from the date of grant. No stock appreciation rights have been granted. During 2000, 250,000 shares of restricted Common Stock were issued to eligible participants, subject to certain forfeiture provisions. In connection with this issuance of restricted stock, the Company recorded deferred compensation of $188,000 representing the value of stock on the date of issuance based upon market price. This amount is being amortized over the three year vesting period of the restricted stock at which time all remaining forfeiture provisions will end. In addition, during 2000, options to purchase an aggregate of 25,000 shares of Common Stock were granted to non-employees at an exercise price of $.75 per share (market price). In connection with this issuance, the Company recorded deferred compensation of $18,000 based upon the estimated fair value of these options at the time of grant, using the modified Black-Scholes model. This amount is being amortized over the five year vesting period of the options. A summary of activity with respect to the Company's stock options for employees and directors for 2002, 2001 and 2000 is as follows:
Common Weighted Available Shares Average Options for Future Subject to Exercise Exercisable Option Option Price at Year-End Grants ---------- ---------- ------------- ----------- Balance at January 1, 2000 0 $0.00 0 725,000 ======= ======= Granted 161,000 $0.75 ------- Balance at December 31, 2000 161,000 $0.75 0 564,000 ====== ======= Granted 6,000 $0.93 Exercised (250) $0.70 ------- Balance at December 31, 2001 166,750 $0.75 32,250 558,000 ====== ======= Granted 6,000 $0.95 Exercised (500) $0.82 ------- Balance at December 31, 2002 172,250 $0.76 65,750 552,000 ======= ====== =======
The weighted-average fair value of the options granted was $.65 per share for 2002 and $.73 per share for 2001 and 2000 as estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: (1) expected volatility of 95.5% for 2002, 117.7% for 2001 and 172.1% for 2000; (2) risk-free interest rate of 3.5% for 2002, 4.8% for 2001 and 6.6% for 2000; (3) expected lives of 4.0 years for 2002 and 2001 and 5.9 years for 2000; and (4) dividend yield of 0% for all years. The following table summarizes information about fixed stock options outstanding at December 31, 2002.
Options Outstanding Options Exercisable --------------------------------------------------- -------------------------- Common Weighted Common Weighted Shares Weighted Average Shares Average Range of Subject to Average Remaining Exercise Subject Exercise Exercise Prices Option Contractual Life Price to Option Price - --------------- --------- ---------------- -------- ---------- ------- $0.70 - $0.95 172,250 3.2 years $0.76 65,750 $0.75
F-12 In 2000, under the Company's 2000 Stock Incentive Plan (the "2000 Plan"), the Company granted to two key employees options to purchase an aggregate of 1,000,000 shares of Common Stock at an exercise price of $.61 per share, the then current market price per share. No additional options are available to be granted under the 2000 Plan. The options are subject to achievement of performance goals as determined by the Board of Directors and are exercisable over a six year period. Options and stock issued on exercise of an option are subject to forfeiture if the performance goals are not met within three years from the date of grant. Deferred compensation, representing the difference between the exercise price and the then current market price, is subject to change based upon fluctuations in the Company's stock price. The deferred compensation is being amortized over the expected performance period of three years. 8. OTHER INCOME, NET Other income, net for each of the three years in the period ended December 31, 2002, consists of the following (in thousands):
2002 2001 2000 ----- ----- ---- Interest income $ 96 $ 21 $ 114 Reimbursement for fees and improvements for previously sold property -- 678 -- Gain (loss) on sale of fixed assets 113 (5) -- Proceeds received upon the dissolution of a partnership in excess of its recorded investment balance 50 -- -- Other 52 5 48 ---- ---- ----- Total $311 $ 699 $ 162 ==== ===== =====
9. INCOME TAXES The (provision) benefit for income taxes for each of the three years in the period ended December 31, 2002 was as follows (in thousands):
2002 2001 2000 ----- ----- ----- State income taxes - current $(471) $(172) $ 8 Federal income taxes - current 455 (495) -- Federal income taxes - deferred (363) -- -- ----- ----- ----- $(379) $(667) $ 8 ===== ===== =====
Current income taxes for 2002 and 2001 principally relate to federal alternative minimum tax and state income tax. Income taxes for 2000 principally relate to state franchise taxes. The table below reconciles the expected statutory federal income tax to the actual income tax (provision) benefit (in thousands):
2002 2001 2000 ------ ------- ------ Expected federal income tax $3,149 $(102) $ 846 State income taxes, net of federal income tax benefit (306) (112) 5 Federal alternative minimum tax refund (payment) 455 (495) -- Otay Land Company taxable income allocated to Leucadia 1,024 221 17 Increase in valuation allowance (4,701) -- (860) Other -- (179) -- ----- ----- ----- Actual income tax (provision) benefit $ (379) $(667) $ 8 ====== ===== =====
F-13 The Company and its wholly-owned subsidiaries have NOLs available for federal income tax purposes of $240,540,000 as of December 31, 2002. For state income tax purposes, available NOLs as of December 31, 2002 total $3,569,000 and expire in 2003 to 2014. The federal NOLs were generated during 1988 to 1999 and expire in 2003 to 2019 as follows (in thousands): Year of Expiration Loss Carryforwards ------------------ ------------------ 2003 $ 18,698 2004 7,413 2005 -- 2006 150,437 2007 8,045 Thereafter 55,947 -------- $240,540 ======== A substantial majority of these NOLs are not available to reduce federal alternative minimum taxable income, which is currently taxed at the rate of 20%. As a result, once the Company's NOLs that are available to reduce federal alternative minimum taxable income are either used or expire, the Company will pay federal income tax at a rate of 20% during future periods, to the extent these NOLs are available to reduce regular taxable income. At December 31, 2002 and 2001 the net deferred tax asset consisted of the following (in thousands): 2002 2001 --------- ---------- NOL carryforwards $ 84,368 $ 90,591 Land basis 14,877 911 Other, net 7,928 6,599 -------- -------- 107,173 98,101 Valuation allowance (62,431) (98,101) -------- -------- $ 44,742 $ 0 ======== ======== The valuation allowance has been provided on the deferred tax asset due to the uncertainty of future taxable income necessary for realization of the deferred tax asset. The decrease in the valuation allowance primarily results from the recognition of a tax benefit for the expected use of NOLs in conjunction with the acquisition of CDS. 10. EARNINGS PER SHARE Basic and diluted loss per share of common stock was calculated by dividing the net loss by the weighted average shares of common stock outstanding. The number of shares used to calculate basic and diluted loss per common share was 61,688,906, 56,807,903 and 56,762,061 for 2002, 2001 and 2000, respectively. Options to purchase 421,354, 359,841 and 25,372 weighted average shares of common stock outstanding during 2002, 2001 and 2000, respectively, were not included in the computation of diluted loss per share as those options were antidilutive. 11. COMMITMENTS AND CONTINGENCIES Prior to its acquisition by the Company, a subsidiary of CDS entered into a non-cancelable operating lease for its office space, a portion of which was sublet to the Company and a portion of which was sublet to Leucadia. This lease will expire in February 2005, subject to an option to extend for an additional four years. In 2002, the base rent, which escalates 4% each year, was approximately $240,000. Effective October 21, 2002, as a result of the acquisition of CDS, the Company has recorded sublease income from Leucadia for a monthly amount equal to Leucadia's share of the Company's cost for such space and furniture. Such amount aggregated $21,000 for the period from October 21, 2002 to December 31, 2002. Effective January 2003, the monthly rental fee from Leucadia was decreased to $5,500. Rental expense (net of sublease income) was $227,000, $246,000 and $219,000 for 2002, 2001 and 2000, respectively. F-14 In connection with the development of San Elijo Hills, CDS has provided a letter of credit in the amount of approximately $273,000 which expires in December 2003. The letter of credit is collateralized by a certificate of deposit in the same amount, which is reflected in other assets. The Company is required to obtain infrastructure improvement bonds primarily for the benefit of the City of San Marcos prior to the beginning of lot construction work and warranty bonds upon completion of such improvements in the San Elijo Hills project. These bonds provide funds primarily to the City in the event the Company is unable or unwilling to complete certain infrastructure improvements in the San Elijo Hills project. Leucadia has obtained these bonds on behalf of CDS, and CDS is responsible for paying all third party fees related to obtaining the bonds. Should the City or others draw on the bonds for any reason, one of CDS's subsidiaries would be obligated to reimburse Leucadia for the amount drawn. As of December 31, 2002, the amount of outstanding bonds was $30,022,000. The Company is subject to various litigation which arises in the course of its business. Based on discussions with counsel, management is of the opinion that such litigation is not likely to have any material adverse effect on the consolidated financial position of the Company, its consolidated results of operations or liquidity. 12. OTHER RELATED PARTY TRANSACTIONS The Company has entered into the following related party transactions with Leucadia and LFC. (a) Development Management Agreement. In August 1998, the Company entered --------------------------------- into a development management agreement with an indirect subsidiary of Leucadia that owned certain real property located in the city of San Marcos, County of San Diego, California, to develop the San Elijo Hills project. The development management agreement provided that the Company would act as the development manager with responsibility for the overall management of the project, including arranging financing for the project, coordinating marketing and sales activity, and acting as the construction manager. The development management agreement also provided that the Company would participate in the net profits of the project through the payment of a success fee and fee income for field overhead, management and marketing services based on the revenues derived from the project. As a result of the acquisition of CDS on October 21, 2002, the Company acquired this indirect subsidiary of Leucadia. Subsequently, the development management agreement was amended to eliminate the success fee provisions. In 2002, 2001 and 2000, the Company recorded $1,610,000, $4,775,000 and $3,464,000, respectively, in fee income under the development management agreement. (b) Otay Land Company, LLC. In October 1998, the Company and Leucadia ---------------------- formed Otay Land Company to purchase approximately 4,850 acres of land, which is part of a 22,900 acre project located south of San Diego, California, known as Otay Ranch. Otay Land Company acquired this land for $19,500,000. The Company has contributed $12,105,000 as capital and Leucadia has contributed $10,000,000 as a preferred capital interest. The Company is the managing member of Otay Land Company. All distributions by Otay Land Company shall be distributed to the Company and Leucadia in the following order of priority: (i) to pay Leucadia an annual minimum cumulative preferred return of 10% on all preferred capital contributed by Leucadia; (ii) to pay Leucadia an annual cumulative preferred return of 2% on all preferred capital provided by Leucadia, but payable only out of and to the extent there are profits; (iii) to repay all preferred capital provided by Leucadia; and (iv) any remaining funds are to be distributed to the Company. During 2002, Otay Land Company made a distribution of $2,524,000 to Leucadia. At December 31, 2002, Leucadia's preferred capital interest and cumulative preferred return, which is reflected as minority interest in the consolidated balance sheet, totaled $11,684,000. (c) Administrative Services Agreement. Pursuant to administrative services --------------------------------- agreements, LFC provides administrative services to the Company through December 31, 2003, including providing the services of one of the Company's executive officers. Administrative fees paid to LFC in 2002, 2001 and 2000 were $120,000, $107,000 and $255,000, respectively. F-15 13. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's material financial instruments include cash and cash equivalents, certificate of deposits, note receivable and notes payable. In all cases, the carrying amounts of such financial instruments approximate their fair values. In cases where quoted market prices are not available, fair values are based on estimates using present value techniques. 14. SELECTED QUARTERLY FINANCIAL DATA (unaudited)
First Second Third Fourth Quarter Quarter Quarter Quarter ------- ---------- -------- ------- (In thousands, except per share amounts) 2002: - ----- Sales of real estate $ -- $ 4,285 $ -- $ 4,974 ======== ======== ======== ======== Co-op marketing and advertising fees $ 470 $ 426 $ 600 $ 446 ======== ======== ======== ======== Development management fee income from San Elijo Hills $ -- $ 1,553 $ 57 $ -- ======== ======== ======== ======== Income from options on real estate properties $ 180 $ 120 $ -- $ -- ======== ======== ======== ======== Cost of sales $ -- $ 809 $ -- $ 2,006 ======== ======== ======== ======== Income (loss) from operations (a) $ (1,156) $ 3,750 $(12,513) $ 612 ======== ======== ======== ======== Net income (loss) (a) $ (1,296) $ 3,101 $(12,342) $ (549) ======== ======== ======== ======== Basic income (loss) per share (b) $ (0.02) $ 0.05 $ (0.22) $ (0.01) ======== ======== ======== ======== Diluted income (loss) per share (b) $ (0.02) $ 0.05 $ (0.22) $ (0.01) ======== ======== ======== ======== 2001: - ----- Co-op marketing and advertising fees $ 168 $ 179 $ 122 $ 559 ======== ======== ======== ======== Development management fee income from San Elijo Hills $ -- $ 1,422 $ 1,852 $ 1,501 ======== ======== ======== ======== Income from options on real estate properties $ 180 $ 180 $ 180 $ 180 ======== ======== ======== ======== Income (loss) from operations $ (1,313) $ 129 $ 516 $ 259 ======== ======== ======== ======== Net income (loss) $ (1,564) $ (113) $ 11 $ 289 ======== ======== ======== ======== Basic income (loss) per share $ (0.03) $ (0.00) $ 0.00 $ 0.01 ======== ======== ======== ======== Diluted income (loss) per share $ (0.03) $ (0.00) $ 0.00 $ 0.01 ======== ======== ======== ========
(a) During the third quarter of 2002, the Company recorded a provision of $11,200,000 relating to environmental remediation. (b) In 2002, the total of quarterly per share amounts does not necessarily equal the annual per share amount. F-16 EX-99 3 bordencerta.txt PAUL J. BORDEN EXHIBIT 99.1 Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED BY SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Paul J. Borden, as Principal Executive Officer of HomeFed Corporation (the "Company") certify, pursuant to 18 U.S.C. ss. 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge: (1) the accompanying Form 10-K/A report for the year ending December 31, 2002 as filed with the U.S. Securities and Exchange Commission (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: May 22, 2003 By: /s/ Paul J. Borden --------------------------- Paul J. Borden Principal Executive Officer A signed original of this written statement required by Section 906 has been provided to HomeFed Corporation and will be retained by HomeFed Corporation and furnished to the Securities and Exchange Commission or its staff upon request. EX-99 4 ruhecerta.txt ERIN N. RUHE CERTIFICATION 99.2 Exhibit 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED BY SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Erin N. Ruhe, as Principal Financial Officer of HomeFed Corporation (the "Company") certify, pursuant to 18 U.S.C. ss. 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge: (1) the accompanying Form 10-K/A report for the year ending December 31, 2002 as filed with the U.S. Securities and Exchange Commission (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: May 22, 2003 By: /s/ Erin N. Ruhe --------------------------- Erin N. Ruhe Principal Financial Officer A signed original of this written statement required by Section 906 has been provided to HomeFed Corporation and will be retained by HomeFed Corporation and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----