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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
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 the Registrant as Specified in its Charter)
Delaware 33-0304982
------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
529 East South Temple
Salt Lake City, Utah 84102
(801) 521-1066
(Address of principal executive offices and telephone number)
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
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Based on the average bid and asked prices of the Registrant's Common Stock
as published by the OTC Bulletin Board Service as of March 18, 1998, the
aggregate market value of the Registrant's Common Stock held by non-
affiliates was approximately $1,836,611 on that date.
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a
plan confirmed by a court.
Yes [X] No
As of March 18, 1998, there were 10,000,000 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 May 18, 1998 Annual Meeting
of Stockholders are incorporated by reference into Part III of this Form
10-K.
<PAGE>
HOMEFED CORPORATION
(the "Company")
PART I
ITEM 1. BUSINESS
Introduction
HomeFed Corporation ("HomeFed" or the "Company") was incorporated
under the laws of Delaware in 1988. Until July 6, 1992, the Company's
principal operating subsidiary was HomeFed Bank, F.S.B. ("HomeFed Bank").
On July 6, 1992, the Office of Thrift Supervision appointed the Resolution
Trust Corporation ("RTC") as receiver for HomeFed Bank and the RTC took
possession and control of HomeFed Bank. On October 22, 1992, the Company
filed a voluntary petition under Chapter 11 of the United States
Bankruptcy Code in the United States Bankruptcy Court for the Southern
District of California. On July 3, 1995, HomeFed emerged from Chapter 11
Bankruptcy protection pursuant to its court approved plan of
reorganization. Set forth below is a description of the Company's plan of
reorganization and a description of the business of the Company following
its emergence from bankruptcy.
Plan of Reorganization
The Company emerged from Chapter 11 Bankruptcy protection on July 3,
1995, pursuant to its Fourth Amended Plan of Reorganization Dated July 15,
1994, as amended (the "Plan"). The Plan was principally funded by a
$20,000,000 convertible note (the "Convertible Note") issued to Leucadia
Financial Corporation ("LFC"), an indirect wholly-owned subsidiary of
Leucadia National Corporation ("Leucadia"), and by LFC's purchase of
2,700,000 newly issued $.01 par value shares ("Common Stock") of the
Company for $810,000. LFC was the largest holder of the Company's
convertible subordinated debentures on the effective date of the Plan.
As part of the Plan, HomeFed settled pending litigation with the RTC
in its capacity as receiver and conservator of HomeFed Bank. Under the
RTC settlement, HomeFed paid the RTC $3,100,000 and HomeFed received a
receivership certificate from the RTC. The receivership certificate was
redeemed by the RTC for $1,402,000 which was paid to HomeFed. The RTC
settlement provides that HomeFed is entitled to receive $850,000 from any
tax refunds received by the RTC relating to HomeFed Bank for years prior
to 1992. The Company received $850,000 related to such tax refunds in
January 1998. Thereafter, the Company paid the entire $850,000 to general
unsecured creditors in accordance with the Plan as described below.
Also under the Plan, general unsecured creditors, principally the
holders of the Company's convertible subordinated debentures, received a
pro rata share of (i) $16,900,000, (ii) the Company's rights to the
$850,000 RTC tax refund relating to HomeFed Bank and the $1,402,000
receivership certificate proceeds, (iii) 1,500,000 shares of Common Stock
valued by the Bankruptcy Court at $.30 per share and (iv) an interest in
the litigation trust described below.
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The Plan also provided for the issuance of 5,800,000 new shares of
Common Stock to the pre-effective date stockholders of the Company and the
old shares of common stock (approximately 21,484,000 shares) were
canceled. As a result of shares received as a general unsecured creditor
and shares purchased as described above, LFC owns approximately 41.2% of
the Company's Common Stock, without giving effect to the Common Stock that
LFC may acquire in the future pursuant to the terms of the Convertible
Note. See Item 13-"Certain Relationships and Related Transactions."
Certain pending claims are being prosecuted by a litigation trust
(the "Litigation Trust") created for the benefit of the Company's
creditors under the Plan. Pursuant to the Plan, the Company loaned
$250,000 to the Litigation Trust in order to pay litigation costs. The
loan was repaid with interest in 1996. The Company will not otherwise
receive any benefits from the Litigation Trust.
Description of Business
The Company is a holding company primarily engaged in the investment
in and development of residential real estate projects in Northern
California, through its wholly-owned subsidiaries HomeFed Communities,
Inc. ("HomeFed Communities") and HomeFed Resources Corporation ("HomeFed
Resources"). The Company's subsidiaries enter into contracts with local
builders and developers to provide construction, marketing and management
services. Revenues of the Company are derived principally from the sale of
real estate in connection with its real estate projects. Expenses consist
principally of construction and development costs, interest on debt and
general and administrative expenses. The Company's current development
projects are described below.
Paradise Valley
Paradise Valley is a new community located in Solano County in the
northeast portion of the City of Fairfield, California. Prior to October
1996, the Company owned approximately one-third of the development project
and the balance of the project was owned by three unrelated development
companies. The Company's holdings originally included 84 acres planned
for four detached single family residential sites, three clustered housing
development sites and a school site. The Company built and sold 36
residential homes during 1995-1997 on two of the detached single family
residential sites before deciding to sell the remaining lots in such sites
to The Forecast Group (Registered Trade Name) , L.P. ("The Forecast Group")
as described below.
On October 3, 1996, the Company entered into agreements with The
Forecast Group pursuant to which the Company agreed to sell a total of 124
improved lots at the Paradise Valley project to The Forecast Group for a
total purchase price of $5,316,000. The sale of 62 lots covered by the
agreements closed in 1996, and the Company received $2,670,000, less
closing costs. The sale of the remaining 62 lots closed in 1997, and the
Company received $2,646,000, less closing costs.
The Company has granted options to The Forecast Group to purchase
156 additional lots for a total purchase price of $5,781,950. The option
with respect to 81 of these lots (the "Unit 4 Option") and the option with
respect to the remaining 75 lots (the "Unit 3 Option") became exercisable
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in 1997. The Unit 3 Option expires on May 1, 1998 and the Unit 4 Option
expires on December 7, 1998.
If exercised in its entirety, the Company would receive an aggregate
of $3,610,650, less closing costs, pursuant to the sales of the lots
covered by the Unit 4 Option. The sale of the first 20 lots covered by
the Unit 4 Option closed on November 7, 1997 and the Company received
$891,520, less closing costs. The sale of the second 20 lots covered by
the Unit 4 Option closed on February 27, 1998 and the Company received
$891,520, less closing costs. If the remainder of the Unit 4 Option is
exercised, 21 lots would be sold on July 6, 1998 and 20 lots would be sold
on December 7, 1998. If the Unit 3 Option is exercised in its entirety,
the Company would receive $2,171,300, less closing costs, pursuant to the
sales of the lots covered by the Unit 3 Option. It is uncertain whether
the options will be exercised in their entirety.
Following the sales to The Forecast Group, and assuming that The
Forecast Group exercises its options, the Company's remaining holdings at
the Paradise Valley project will consist of the three clustered housing
development sites and the school site. The Company is entertaining offers
from potential purchasers with respect to the remaining clustered housing
development sites. If the Company does not receive an acceptable offer
for these sites, the Company will reevaluate its alternatives with respect
to the sale or development of these sites and may request that they be
rezoned as detached single family residential sites or commercial sites;
however, no assurance can be made that the sites will be rezoned. The
school site is designated for an elementary school which the Fairfield-
Suisun School District has the right to purchase at market value. At
December 31, 1997, the book value of the Company's investment in Paradise
Valley was approximately $7,265,000.
Silverwood
The Silverwood project is part of the greater Sacramento
metropolitan area located in Placer County, in a community commonly known
as Granite Bay. Silverwood is a 135 acre development and is planned for
97 single family detached units. At December 31, 1997, the Company owned
78 of the 97 lots, with the balance owned by LFC. On February 27, 1998,
the Company purchased the remaining 19 lots from LFC for a purchase price
of $500,000. The project has a vested tentative map approved by the County
which expires in January 1999. The Company has entered into discussions
with a builder to develop the Silverwood project. The Company anticipates
that this would result in the commencement of development in 1999;
however, no assurance can be given that development will begin at that
time. If the Company determines not to develop the Silverwood project, it
may consider selling its interest in the Silverwood project. At December
31, 1997, the book value of the Company's investment in Silverwood was
approximately $2,387,000.
For information with respect to the Company's plans for future real
estate development projects, see Item 7-"Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
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Competition
The construction and sale of homes is a highly competitive business.
There are numerous other real estate developers operating in the same
geographic areas in which the Company operates. The principal methods of
competition among real estate developers are price and the quality of real
estate sold. The quality of real estate sold depends on various factors,
including the quality of construction and location.
Government Regulation
The housing industry is subject to increasing environmental,
building, zoning and real estate regulations that are imposed by various
federal, state and local authorities. Such regulations affect
homebuilding by specifying, among other things, the type and quality of
building material that must be used, certain aspects of land use and
building design and the manner in which homebuilders may conduct their
sales, operations, and overall relationships with potential home buyers.
In developing a community, the Company must obtain the approval of
numerous governmental agencies regarding such matters as permitted land
uses, housing density, the installation of utility services (such as
water, sewer, gas, electric, telephone and cable television) and the
dedication of acreage for open space, parks, schools and other community
purposes. Furthermore, changes in prevailing local circumstances or
applicable laws may require additional approvals, or modifications of
approvals previously obtained.
Environmental Compliance
Environmental laws may cause the Company to incur substantial
compliance, mitigation and other costs, may restrict or prohibit
development in certain areas and may delay completion of the Company's
development projects. To date, environmental laws have not had a material
adverse effect on the Company, and management is not currently aware of
any environmental compliance matters that would have a material adverse
effect on the Company.
Employees; Administrative Services
Pursuant to an Administrative Services Agreement dated March 1, 1996
(the "Administrative Services Agreement"), LFC agreed to provide
administrative services to the Company for an annual fee of $141,000,
payable in monthly installments, through March 1, 1997. After March 1,
1997, the Administrative Services Agreement provides that LFC and the
Company will negotiate in good faith to determine the compensation to be
paid to LFC under the Administrative Services Agreement for subsequent
periods. The Company and LFC have agreed that the fee to be paid to LFC
for the one-year periods beginning March 1, 1997 and 1998 will be $68,274
and $56,101, respectively. Although these amounts are lower than the fee
paid in the initial year, the Company now pays certain expenses previously
paid by LFC. The Administrative Services Agreement will terminate on
March 1, 1999; provided, however, that LFC may terminate the
Administrative Services Agreement prior to March 1, 1999, upon 30 days
written notice, if the Company and LFC are unable to reach an agreement
regarding the compensation to be paid to LFC for any period.
Administrative fees paid to LFC for the year ended December 31, 1997
totaled $80,000.
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All of the Company's administrative services are currently provided
by LFC and, as of December 31, 1997, the Company had only one employee.
All of the officers of the Company are officers of LFC. See Item 13 -
"Certain Relationships and Related Transactions."
ITEM 2. PROPERTIES
See Item 1 - "Business -- Description of Business" for a description
of the Company's real estate development projects.
The Company's executive offices are located at 529 East South Temple
in Salt Lake City, Utah in an office building occupied and leased by LFC.
LFC provides such office space to the Company in connection with the
administrative services provided to the Company by LFC.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in certain routine legal matters arising in
the normal course of business. In the opinion of management, the ultimate
outcome of these matters will not have a material adverse effect on the
Company's operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
During the fourth quarter of 1997, no matter was submitted to a vote
of the Company's stockholders through the solicitation of proxies or
otherwise.
ITEM 10. EXECUTIVE OFFICERS OF THE REGISTRANT
Office
Position with Held
Name Age the Company Since
- ---------------- ----- --------------- --------
Patricia A. Wood 33 President 1995
Corinne A. Maki 41 Treasurer, 1995
Vice President and
Secretary
The officers serve at the pleasure of the Board of Directors of the
Company.
The recent business experience of the Company's executive officers
is summarized as follows:
Patricia A. Wood.
Ms. Wood has served as President of the Company since February 1995
and as President of HomeFed Communities and HomeFed Resources since August
1994. Ms. Wood also served as Executive Vice President of the Company
from April 1993 to July 1994 and as Chief Financial Officer from October
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1992 to April 1993. From September 1989 to October 1992, Ms. Wood was the
Assistant Controller for Douglas Allred Co., a real estate development
company. Ms. Wood is also the President of LFC.
Corinne A. Maki.
Ms. Maki, a certified public accountant, has served as Treasurer of
the Company since February 1995. Ms. Maki has also served as Secretary
and Vice President of the Company since February, 1998 and prior thereto
had served as an Assistant Secretary of the Company since August 1995. Ms.
Maki has also been a Vice President of LFC, holding the offices of
Controller, Assistant Secretary and Treasurer, since October 1992. Ms.
Maki has been employed by Leucadia since December 1991.
Based solely upon a review of Forms 3 and 4 and amendments thereto
furnished to the Company during its most recent fiscal year and Form 5 and
amendments thereto furnished to the Company with respect to its most
recent fiscal year, and written representations furnished to the Company,
the Company has determined that, to the best of the Company's knowledge,
during 1997 all reports required by Section 16(a) of the Exchange Act were
filed on a timely basis.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The following table sets forth certain information concerning the
market price of the Company's Common Stock for each quarterly period
within the two most recent fiscal years.
High Low
-------- --------
Year ended December 31, 1996
First Quarter $ 1.25 $ .25
Second Quarter 1.25 .125
Third Quarter .375 .125
Fourth Quarter .375 .125
Year ended December 31, 1997
First Quarter $ .50 $ .03125
Second Quarter .375 .0625
Third Quarter .375 .0625
Fourth Quarter .375 .0625
The Company's Common Stock is traded in the over-the-counter market.
The Company's Common Stock is not listed on any stock exchange, and price
information for the Common Stock is not regularly quoted on any automated
quotation system. The prices above are based on bid quotations, as
published by the National Association of Securities Dealers OTC Bulletin
Board Service, and represent interdealer prices without retail mark-up,
mark-down or commission, and may not necessarily represent actual
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transactions. On March 18, 1998, the bid price for the Company's Common
Stock, was $.3125 per share. As of this date, there were approximately
10,433 stockholders of record. The Company did not declare dividends on
its Common Stock during 1996 or 1997 and it does not anticipate that it
will pay dividends for the foreseeable future.
The Company's Common Stock does not currently meet the minimum
requirements for listing on a national securities exchange or inclusion in
the Nasdaq Stock Market. If the Company's Common Stock becomes eligible
to be listed or included in the Nasdaq Stock Market, the Company will
consider its alternatives with respect to the trading market for the
Company's Common Stock.
The transfer agent for the Company's Common Stock is American Stock
Transfer Company, 40 Wall Street, New York, New York 10005.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data have been summarized from the
Company's consolidated financial statements and are qualified in their
entirety by reference to, and should be read in conjunction with, such
consolidated financial statements and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," under Item 7
below.
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<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
SELECTED INCOME STATEMENT DATA:
Sales of residential and commercial properties $ 4,011 $ 8,988 $ 9,422 $ 4,484 $ 8,527
Gross profit (loss) (37) (464) 426 66 369
Interest expense 2,997 3,063 1,458 - -
Loss from operations (3,864) (6,424) (2,435) (3,020) (10,619)
Reorganization expenses - - (1,924) (1,424) (1,633)
Loss before extraordinary items (3,577) (6,297) (4,161) (4,294) (9,573)
Extraordinary items:
Equity in joint venture's extinguishment of debt - - - - 3,051
Extinguishment of debt - bankruptcy - - 108,881 - -
Net earnings (loss) (3,577) (6,297) 104,720 (4,294) (6,522)
Per share:
Basic earnings (loss) per common share:
Loss before extraordinary items $ (0.36) $ (0.63) $ (0.42) $ (0.43) $ (0.96)
Extraordinary items - - 10.89 - 0.31
--------- --------- --------- --------- ---------
Net earnings (loss) $ (0.36) $ (0.63) $ 10.47 $ (0.43) $ (0.65)
========= ========= ========= ========= =========
Diluted earnings (loss) per common share:
Loss before extraordinary items $ (0.36) $ (0.63) $ (0.09) $ (0.43) $ (0.96)
Extraordinary items - - 3.35 - 0.31
--------- --------- --------- --------- ---------
Net earnings (loss) $ (0.36) $ (0.63) $ 3.26 $ (0.43) $ (0.65)
========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
At December 31,
---------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
SELECTED BALANCE SHEET DATA:
Land and real estate held for development $ 9,652 $ 13,528 $ 22,069 $ 21,139 $ 22,071
Total assets 15,457 17,091 26,851 23,387 27,453
Notes payable to Leucadia Financial Corporation 26,085 23,877 26,996 1,199 -
Other notes payable - - 126 173 986
Stockholders' deficit (10,739) (7,162) (865) (106,845) (102,551)
Shares outstanding 10,000 10,000 10,000 10,000 10,000
Book value per common share $ (1.07) $ (0.72) $ (0.09) $ (10.68) $ (10.26)
</TABLE>
Basic earnings (loss) per common share and book value per common
share were calculated assuming the 10,000,000 shares of Common Stock
issued on July 3, 1995 were the only shares outstanding for all years
presented. Book value per common share calculations based upon the pre-
effective date outstanding shares are not meaningful.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The purpose of this section is to discuss and analyze the Company's
consolidated financial condition, liquidity and capital resources and
results of operations. This analysis should be read in conjunction with
the consolidated financial statements and related notes which appear
elsewhere in this report.
Liquidity and Capital Resources
As more fully described in Item 1 - "Business," on July 3, 1995, the
Company emerged from Chapter 11 Bankruptcy protection pursuant to its
court approved plan of reorganization. The Plan was principally funded by
a $20,000,000 Convertible Note issued to LFC and the sale to LFC of
2,700,000 newly issued shares of Common Stock for $810,000. The funds
received from LFC were used along with other consideration to satisfy the
Company's liabilities subject to compromise of approximately $127,458,000
and to settle pending litigation with the RTC.
For the years ended December 31, 1997 and 1996, net cash was
provided by operating activities, principally from sales of real estate.
For the year ended December 31, 1995, net cash was used by operating
activities, principally for real estate development projects and to pay
reorganization expenses. The Company is a holding company and its
principal sources of funds are dividends or borrowings from its
subsidiaries. As a result, the Company is dependent upon the cash flow,
if any, from the real estate development projects of its subsidiaries in
order to pay its expenses, including debt service payments on the
Convertible Note. The Company paid $789,000 of interest on December 31,
1997 and the Board of Directors has approved the interest payment of
$772,000 due on March 31, 1998. No principal payments are due on the
Convertible Note until September 1998 and accrued interest is only
required to be paid under certain conditions. See Item 13-"Certain
Relationships and Related Transactions."
LFC has agreed to provide up to an aggregate of $15,000,000 of
construction financing to certain of the Company's subsidiaries and their
affiliates while the Convertible Note is outstanding. Amounts outstanding
under the construction financing are collateralized by certain assets of
the Company's subsidiaries or their affiliates, including real estate
under development. To facilitate the sale of property to home buyers, LFC
has agreed to release property from the construction financing lien when
it receives 110% of the assigned cost of construction as a payment towards
the outstanding loan. The construction financing bears interest based
upon the prime rate, and any unpaid interest is added to the principal
balance at the end of each month. As of December 31, 1997, there was no
outstanding balance on the construction financing. The Company believes
that the construction financing provided by LFC will be adequate to
complete its current development plans. Any additional financing required
from a lender other than LFC cannot be collateralized by any of the
Company's assets without LFC's consent. Accordingly, the Company may be
unable to obtain additional financing from sources other than LFC.
On October 3, 1996, the Company entered into agreements with The
Forecast Group pursuant to which the Company agreed to sell a total of 124
improved lots at the Paradise Valley project to The Forecast Group for a
total purchase price of $5,316,000. The sale of 62 lots covered by the
agreements closed in 1996 and the Company received $2,670,000, less
closing costs. The sale of the remaining 62 lots closed in 1997 and the
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Company received $2,646,000, less closing costs. The Company applied all
of the proceeds from the 1996 sales to reduce the outstanding balance of
the construction financing provided by LFC. The Company used the proceeds
from the 1997 sales for working capital needs.
The Company has granted options to The Forecast Group to purchase 156
additional lots from the Company for a total purchase price of $5,781,950.
See Item 1-"Business--Description of Business". These options became
exercisable in 1997. The Unit 3 Option expires on May 1, 1998 and the
Unit 4 Option expires on December 7, 1998.
If exercised in its entirety, the Company would receive an aggregate
of $3,610,650, less closing costs, pursuant to the sales of the lots
covered by the Unit 4 Option. The sale of the first 20 lots covered by
the Unit 4 Option closed on November 7, 1997 and the Company received
$891,520, less closing costs. The sale of the second 20 lots closed on
February 27, 1998 and the Company received $891,520, less closing costs.
If the remainder of the Unit 4 Option is exercised, 21 lots would be sold
on July 6, 1998 and 20 lots would be sold on December 7, 1998. If the
Unit 3 Option is exercised, the Company would receive $2,171,300,less
closing costs, pursuant to the sales of the lots covered by the Unit
3 Option. It is uncertain whether the options will be exercised in their
entirety; however, to the extent such options are exercised, the Company
expects to use the proceeds from the sale of the lots covered by such
options for future real estate development, debt service payments on the
Convertible Note and for working capital needs.
The Company continues to seek opportunities for additional real
estate development projects. Any such projects would be funded by the
$15,000,000 construction financing and the remaining cash proceeds from
the sales to The Forecast Group. On February 27, 1998, the Company
purchased 19 additional lots in the Silverwood project from LFC for
$500,000. After July 1998, however, the ability of the Company to
undertake new development projects will depend significantly upon the
actions of LFC with respect to its investment in the Company. If LFC does
not exchange the Convertible Note for shares of Common Stock of the
Company, the Company will be required to begin making principal and
interest payments in September 1998 under the payment terms of the
Convertible Note. Accordingly, most of the Company's cash resources would
have to be used for payments on the Convertible Note. Based upon the current
state of the Company's real estate activities, and assuming both the Unit 3
Option and the Unit 4 Option are exercised in their entirety, the Company
currently estimates that its cash flows will be sufficient to make payments
on the Convertible Note and cover operating expenses through December 31, 1999.
It is uncertain whether the Company will have the ability to continue making
payments on the Convertible Note and cover operating expenses after December
31, 1999. If, however, LFC decides to exchange the Convertible Note for Common
Stock of the Company, the Company will be able to use its cash resources for
additional development projects. LFC has not advised the Company as to whether
it intends to exchange the Convertible Note, and no assurance can be given
that LFC will exchange the Convertible Note.
The Company has net operating loss ("NOL") carryforwards available
for federal income tax purposes of $252,689,000 and available NOLs for
state income tax purposes of $14,926,000 as of December 31, 1997. The
Company's NOLs and temporary differences between the book basis and tax basis
of the Company's assets in the amount of $6,078,000 result in a deferred tax
asset of $95,701,000. A valuation allowance of $95,701,000 has been provided
on the total amount of the Company's deferred tax asset due to the uncertainty
of future taxable income necessary for realization of the deferred tax asset.
See Note 5 to the Company's consolidated financial statements.
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Results of Operations
Sales of residential properties decreased in 1997 as compared to
1996 due to the sale of lots to The Forecast Group and due to fewer new
home sales and no trade home sales. The remaining two residential homes
at Paradise Valley were sold in 1997.
Sales of residential properties decreased in 1996 as compared to
1995 due to the sale of lots to The Forecast Group and due to fewer new
and trade home sales. Except for two homes, all remaining residential
homes at Paradise Valley were sold in 1996.
The decrease in cost of sales in 1997 as compared to 1996 reflects
the decreased level of home and lot sales. Gross profit percentages for
both years reflect the mix of lots and homes sold.
The increase in cost of sales in 1996 as compared to 1995 reflects
the increased cost of homes sold primarily due to the reallocation of
Paradise Valley costs to residential home inventory based on the Company's
decision to build fewer homes.
Land and real estate held for development is carried at the lower of
cost or fair value less costs to sell. The provision for losses for the
years ended December 31, 1997 and 1996 reflect the Company's estimates to
reduce the carrying value of the real estate investments to fair value
less costs to sell. See Notes 1 and 6 to the Company's consolidated
financial statements.
Interest expense for all years presented primarily reflects the
interest due on the Convertible Note to LFC, including interest of
$2,208,000 for 1997, $2,669,000 for 1996 and $1,208,000 for 1995, which
was not paid and was added to the principal balance of the note as
stipulated under the note agreement. Interest expense for 1997 also
reflects interest of $789,000 due on the Convertible Note which was paid
by the Company during the fourth quarter of 1997. Interest on the
construction loan was also expensed for construction phases that were
substantially complete. Interest of $385,000 and $167,000 was expensed on
the construction loan in 1996 and 1995, respectively. No amounts were
outstanding on the construction loan during 1997.
The decrease in general and administrative expenses in 1997 compared
to 1996 reflects reduced professional fees and insurance costs and the
decreased selling expenses attributable to the Paradise Valley project which
was substantially completed in 1996.
The decrease in general and administrative expenses in 1996 as
compared to 1995 reflects the decreased selling expenses attributable to
the Carson Creek project, which was substantially completed in 1995.
Reorganization expenses decreased in 1996 as a result of the
Company's emergence from bankruptcy in July 1995.
Income tax expense for all years presented principally relates to
state franchise taxes. The Company has not recognized any income tax
12
<PAGE>
benefit for its operating losses in all years presented due to the
uncertainty of sufficient future taxable income which is required in order
to recognize such tax benefits.
In 1995, the extraordinary gain on debt discharged in bankruptcy
resulted from the Company's satisfaction of liabilities to creditors
subject to compromise of approximately $127,458,000, principally by the
payment of $18,302,000 and the issuance of 1,500,000 shares of Common
Stock.
General Economic Factors
The Company, as well as the real estate industry in general, may be
adversely affected during periods of high inflation, primarily because of
higher land and construction costs. Higher interest rates may also affect
the affordability and availability of financing to prospective purchasers.
In addition, as all of the Company's real estate projects are located in
California, the Company's operations are particularly dependent upon that
state's economic conditions.
The Year 2000 Issue
The Company believes that it will not incur any material additional
expenses to modify computer hardware or software due to the upcoming
change in the century.
Cautionary Statement for Forward Looking Information
Statements included in this Management's Discussion and Analysis of
Financial Condition and Results of Operations may contain forward-looking
statements. Such forward-looking statements are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995.
Such statements may relate, but not be limited, to projections of
revenues, income or loss, capital expenditures, the expected development
schedule of existing real estate projects, plans for growth and future
operations, financing needs, as well as assumptions relating to the
foregoing. Forward-looking statements are inherently subject to risks and
uncertainties, some of which cannot be predicted or quantified. When used
in this "Management's Discussion and Analysis of Financial Condition and
Results of Operations," the words "estimates", "expects", "anticipates",
"forecasts", "plans", "intends" and variations of such words and similar
expressions are intended to identify forward-looking statements that
involve risks and uncertainties. Future events and actual results could
differ materially from those set forth in, contemplated by or underlying
the forward-looking statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements and supplementary data required by this Item 8
are set forth at the pages indicated in Item 14(a) below.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES
Not applicable.
13
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information to be included under the caption "Nominees for
Election as Directors" in the Company's definitive proxy statement to be
filed with the Commission pursuant to Regulation 14A of the Exchange Act
in connection with the 1998 Annual Meeting of Stockholders of the Company
(the "Proxy Statement") is incorporated herein by reference. In addition,
reference is made to Item 10 in Part I of this Report.
The Directors of the Company are Timothy Considine, Michael A.
Lobatz and Patricia A. Wood. Mr. Considine is the Managing Partner of
Considine and Considine, an accounting firm, and Mr. Lobatz is a
practicing physician. Ms. Wood is President of the Company and an officer
of LFC.
ITEM 11. EXECUTIVE COMPENSATION
The information to be included under the caption "Executive
Compensation" in the Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information to be included under the caption "Present
Beneficial Ownership of Common Stock" in the Proxy Statement is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As described above, LFC agreed to provide administrative services
to the Company pursuant to the Administrative Services Agreement for an
annual fee of $141,000 through March 1, 1997. After March 1, 1997, the
Administrative Services Agreement provides that LFC and the Company will
negotiate in good faith to determine the compensation to be paid to LFC
under the Administrative Services Agreement for subsequent periods. The
Company and LFC have agreed that the fee to be paid to LFC for the one-
year periods beginning March 1, 1997 and 1998 will be $68,274 and $56,101,
respectively. Although these amounts are lower than the fee paid in the
initial year, the Company now pays certain expenses previously paid by
LFC. Both of the officers of the Company are officers of LFC and receive
compensation from LFC or Leucadia. Except for Ms. Wood, who is the only
employee of the Company, the officers of the Company did not receive
compensation directly from the Company in 1997.
The Company's executive offices are located at 529 East South
Temple in Salt Lake City, Utah in an office building occupied and leased
by LFC. LFC provides such office space to the Company in connection with
the administrative services provided to the Company by LFC.
As described above under Item 1 - "Business -- Plan of
Reorganization," the Company emerged from Chapter 11 Bankruptcy protection
pursuant to its court approved plan of reorganization. The Plan was
principally funded by the issuance of the $20,000,000 Convertible Note to
14
<PAGE>
LFC and the sale to LFC of 2,700,000 newly issued shares of Common Stock
for $810,000. The Convertible Note bears interest at 12% per annum payable
quarterly; however, interest is only paid if the Company has sufficient
funds available, as determined pursuant to the provisions of the loan
agreement relating to the Convertible Note. Unpaid interest is added to
the principal balance each quarter. The Convertible Note matures on July
3, 2003. Commencing July 6, 1998, the Convertible Note, including any
accrued interest previously added to the principal balance, may be
exchanged for up to a maximum of 54,400,000 shares of Common Stock at a
conversion price of $.45 per share, subject to certain restrictions. The
Convertible Note is collateralized by all of the Company's assets and has
been guarantied by each of the Company's subsidiaries. The guaranties of
the Company's subsidiaries are collateralized by all of the assets of such
subsidiaries. LFC owns 4,117,986 shares or approximately 41.2% of the
outstanding Common Stock of the Company, without giving effect to the
Common Stock that LFC may acquire in the future pursuant to the terms of
the Convertible Note.
In addition to loaning $20,000,000 to the Company pursuant to the
Convertible Note, LFC has agreed to provide up to an aggregate of
$15,000,000 of construction financing to certain of the Company's
subsidiaries and their affiliates for as long as the Convertible Note is
outstanding. The construction financing is collateralized by certain
assets of the Company's subsidiaries or their affiliates. The
construction financing bears interest based on the prime rate, and any
unpaid interest is added to the principal balance at the end of each
month. No amounts were outstanding under the construction financing as of
December 31, 1997.
On February 27, 1998, the Company purchased 19 lots at the
Silverwood project from LFC for a purchase price of $500,000. The lots
were appraised at $600,000 by an independent appraiser; however, the
President of the Company, who is also an officer of LFC, determined that
a purchase price of $500,000 more accurately reflected the value of the
lots based upon her experience with the project and her analysis of the
assumptions made by the appraiser.
15
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
(a)(1) Financial Statements
Report of Independent Accountants F-1
Consolidated Balance Sheets at F-2
December 31, 1997 and 1996
Consolidated Statements of F-3
Operations for the years ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Changes F-4
in Stockholders' Deficit for the
years ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash F-5
Flows for the years ended December 31,
1997, 1996 and 1995
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) The following exhibits are filed herewith or incorporated by
reference:
Exhibit
Number Exhibit
- --------- ---------
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).
16
<PAGE>
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 November 10, 1995
(incorporated by reference to Exhibit 3.2 to the Company's
quarterly report on Form 10-Q for the quarter ended September 30,
1995).
10.1 Letter Agreement dated July 3, 1995 between the Company and
Leucadia Financial Corporation and Second Amended and Restated
Promissory Note dated August 31, 1995 (incorporated by reference
to Exhibit 10.1 to the Company's quarterly report on Form 10-Q for
the quarter ended September 30, 1995).
10.2 Loan Agreement dated July 3, 1995 between the Company and
Leucadia Financial Corporation 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).
10.3 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).
10.4 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).
10.5 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).
10.6 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).
10.7 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).
17
<PAGE>
10.8 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).
21 * Subsidiaries of the Company.
27 * Financial Data Schedule.
* Filed with this report.
(b) Reports on Form 8-K
Not Applicable.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
HOMEFED CORPORATION
Date: March 19, 1998 By /s/ Corinne A. Maki
---------------------------------------
Corinne A. Maki, Vice President,
Secretary and Treasurer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.
Date: March 12, 1998 By /s/ Timothy Considine
---------------------------------------
Timothy Considine, Director and
Chairman of the Board
Date: March 11, 1998 By /s/ Patricia A. Wood
----------------------------------------
Patricia A. Wood, Director
(Principal Executive Officer)
Date: March 19, 1998 By /s/ Corinne A. Maki
----------------------------------------
Corinne A. Maki, Vice President,
Secretary and Treasurer
(Principal Financial and Accounting
Officer)
Date: March 19, 1998 By /s/ Michael A. Lobatz
---------------------------------------
Michael A. Lobatz, Director
19
<PAGE>
Report of Independent Accountants
To the Board of Directors of
HomeFed Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheets of HomeFed
Corporation and Subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, changes in stockholders'
deficit and cash flows for each of the three years in the period ended
December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of HomeFed
Corporation and Subsidiaries as of December 31,1997 and 1996, and the
consolidated results of their operations and their cash flows for the each
of the three years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Salt Lake City, Utah
March 3, 1998
F-1
<PAGE>
HomeFed Corporation and Subsidiaries
Consolidated Balance Sheets
December 31, 1997 and 1996
(Dollars in thousands, except par value)
______________________________
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
ASSETS
Land and real estate held for development $ 9,652 $ 13,528
Cash and cash equivalents 4,195 1,809
Restricted cash 1,073 1,085
Investments 75 71
Deposits and other assets 462 598
---------- ----------
TOTAL $ 15,457 $ 17,091
========== ==========
LIABILITIES
Note payable to Leucadia Financial Corporation $ 26,085 $ 23,877
Accounts payable and accrued liabilities 111 376
---------- ----------
Total liabilities 26,196 24,253
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT
Common Stock, $.01 par value; 100,000,000 shares
authorized; 10,000,000 shares outstanding 100 100
Additional paid-in capital 339,904 339,904
Accumulated deficit (350,743) (347,166)
---------- ----------
Total stockholders' deficit (10,739) (7,162)
---------- ----------
TOTAL $ 15,457 $ 17,091
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE>
HomeFed Corporation and Subsidiaries
Consolidated Statements of Operations
For the years ended December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share amounts)
________________________________
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Sales of residential properties $ 4,011 $ 8,988 $ 9,422
Cost of sales 4,048 9,452 8,996
---------- ---------- ----------
Gross profit (loss) (37) (464) 426
Provision for losses on real estate investments 153 1,583 -
Interest expense relating to Leucadia Financial Corporation 2,997 3,054 1,375
Other interest expense - 9 83
General and administrative expenses 597 1,171 1,261
Management fees to Leucadia Financial Corporation 80 143 142
---------- ---------- ----------
Loss from operations (3,864) (6,424) (2,435)
Other income - net 319 181 220
---------- ---------- ----------
Loss before reorganization items (3,545) (6,243) (2,215)
Reorganization items:
RTC settlement and professional fees - - 1,924
---------- ---------- ----------
Loss before income taxes (3,545) (6,243) (4,139)
Income tax expense (32) (54) (22)
---------- ---------- ----------
Loss before extraordinary item (3,577) (6,297) (4,161)
Extraordinary item:
Extraordinary gain on debt discharged in bankruptcy - - 108,881
---------- ---------- ----------
Net earnings (loss) $ (3,577) $ (6,297) $ 104,720
========== ========== ==========
Basic earnings (loss) per common share:
Loss before extraordinary item $ (0.36) $ (0.63) $ (0.42)
Extraordinary item - - 10.89
---------- ---------- ----------
Net earnings (loss) $ (0.36) $ (0.63) $ 10.47
========== ========== ==========
Diluted earnings (loss) per common share:
Loss before extraordinary item $ (0.36) $ (0.63) $ (0.09)
Extraordinary item - - 3.35
---------- ---------- ----------
Net earnings (loss) $ (0.36) $ (0.63) $ 3.26
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
HomeFed Corporation and Subsidiaries
Consolidated Statements of Changes in Stockholders' Deficit
For the years ended December 31, 1997, 1996 and 1995
(Dollars in thousands)
-----------------------------------------------------------
<TABLE>
<CAPTION>
Common
Stock Additional Total
$.01 Par Paid-in Accumulated Stockholder's
Value Capital Deficit Deficit
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Balance, January 1, 1995 $ 215 $ 338,529 $ (445,589) $ (106,845)
Cancellation of old shares (215) 215
Issuance of new shares to previous
stockholders 58 (58)
Issuance of new shares to Leucadia
Financial Corporation for cash 27 783 810
Issuance of new shares to creditors 15 435 450
Net earnings 104,720 104,720
--------------- --------------- --------------- ---------------
Balance, December 31, 1995 100 339,904 (340,869) (865)
Net loss (6,297) (6,297)
--------------- --------------- --------------- ---------------
Balance, December 31, 1996 100 339,904 (347,166) (7,162)
Net loss (3,577) (3,577)
--------------- --------------- --------------- ---------------
Balance, December 31, 1997 $ 100 $ 339,904 $ (350,743) $ (10,739)
=============== =============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
HomeFed Corporation and Subsidiaries
Consolidated Statements of Cash Flows
For the years ended December 31, 1997, 1996 and 1995
(Dollars in thousands)
----------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ (3,577) $ (6,297) $ 104,720
Adjustments to reconcile net earnings (loss) to net cash provided by (used
in) operating activities:
Extraordinary gain on debt discharged in bankruptcy - - (108,881)
Provision for losses on real estate investments 153 1,583 -
Accrued interest added to notes payable to Leucadia Financial Corporation 2,208 2,957 1,524
Changes in operating assets and liabilities:
Land and real estate held for development 3,723 6,958 (930)
Deposits and other assets 136 366 129
Accounts payable and accrued liabilities (265) (218) (808)
Decrease (increase) in restricted cash 12 20 (963)
---------- ---------- ----------
Net cash provided by (used in) operating activities 2,390 5,369 (5,209)
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (increase) in other assets - 250 (250)
Distributions from joint ventures - 7 -
Decrease (increase) in investments (4) 12 13
---------- ---------- ----------
Net cash provided by (used in) investing activities (4) 269 (237)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to notes payable to Leucadia Financial Corporation - 1,439 25,960
Repayments of notes payable to Leucadia Financial Corporation - (7,515) (1,687)
Repayments of other notes payable - (126) (47)
Payments to settle liabilities subject to compromise - - (18,302)
Issuance of new shares to Leucadia Financial Corporation for cash - - 810
---------- ---------- ----------
Net cash provided by (used in) financing activities - (6,202) 6,734
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents 2,386 (564) 1,288
Cash and cash equivalents, beginning of year 1,809 2,373 1,085
---------- ---------- ----------
Cash and cash equivalents, end of year $ 4,195 $ 1,809 $ 2,373
========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest (net of amounts capitalized) $ 789 $ 492 $ 151
========== ========== ==========
Cash paid for income taxes $ 31 $ 59 $ 25
========== ========== ==========
Reorganization items:
Cash paid for RTC settlement and professional fees $ - $ - $ 2,578
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
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"),
its wholly-owned subsidiaries HomeFed Communities, Inc. ("HomeFed
Communities") and HomeFed Resources Corporation and their wholly-owned
partnerships. The Company is engaged, through its subsidiaries, in the
investment in and development of residential real estate properties in
Northern California. All significant intercompany balances and
transactions have been eliminated in consolidation.
Certain amounts for prior periods have been reclassified to be
consistent with the 1997 presentation.
Land and Real Estate Held for Development - Land and real estate held
for development is carried at the lower of cost or fair value less
costs to sell. The cost of land and real estate held for development
includes all expenditures incurred in connection with the acquisition,
development, and construction of the property, including interest and
property taxes. Revenue from incidental operations relating
specifically to property under development is treated as a reduction
of capitalized costs. Land costs included in land and real estate
held for development are allocated to lots based on relative fair
values prior to development and are charged to cost of sales at the
time of sale.
Cash and Cash Equivalents - Cash and cash equivalents include short-
term, highly liquid investments that are readily convertible to cash.
The majority of the Company's cash and cash equivalents are held by
one financial institution in Salt Lake City, Utah.
Restricted Cash - Restricted cash consists of amounts reserved for
warranty obligations on homes sold and amounts reserved as collateral
relating to an outstanding standby letter of credit.
Investments - Investments consist of liquid mutual fund accounts and
are carried at cost, which approximates market value.
Revenue Recognition - Revenue from the sale of real estate is
recognized at the time title is conveyed to the buyer at the close of
escrow, minimum down payment requirements are met, the terms of any
notes received satisfy continuing payment requirements, and there are
no requirements for continuing involvement by the Company with the
properties. When it is determined that the earnings process is not
complete, income is deferred using the installment, cost recovery or
percentage of completion methods of accounting, as appropriate.
Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
F-6
<PAGE>
Notes to Consolidated Financial Statements, continued
1. Summary of Significant Accounting Policies, continued:
Provisions for Losses on Real Estate Investments - Management
periodically assesses the recoverability of its real estate
investments by comparing the carrying amount of the investments with
their fair value less costs to sell. The process involved in the
determination of fair value requires estimates as to future events and
market conditions. This estimation process assumes the Company has
the ability to complete development and dispose of its real estate
properties in the ordinary course of business based on management's
present plans and intentions. When management determines that the
carrying value of specific real estate investments should be reduced
to properly record these assets at fair value less costs to sell, the
write-down is recorded as a charge to current period operations .
Capitalization of Interest and Real Estate Taxes - Interest and real
estate taxes attributable to land and home construction are
capitalized and added to the cost of those properties while the
properties are being actively developed.
Recent Accounting Pronouncements - In February 1997, the Financial
Accounting Standards Board issued Statement of Financial Accounting
Standards No. 128, "Earnings per Share" ("SFAS No. 128") which
simplifies existing computational guidelines, revises disclosure
requirements, and increases the comparability of earnings per share on
an international basis. The adoption of SFAS No. 128 had no effect on
the Company's earnings (loss) per share calculations for all years
presented.
2. CHAPTER 11 BANKRUPTCY AND PLAN OF REORGANIZATION
On July 3, 1995, the Company emerged from Chapter 11 Bankruptcy
protection pursuant to its court approved plan of reorganization (the
"Plan"). The Plan was principally funded by a $20,000,000 convertible note
(the "Convertible Note") issued to Leucadia Financial Corporation ("LFC"),
an indirect wholly-owned subsidiary of Leucadia National Corporation, and
by LFC's purchase of 2,700,000 newly issued $.01 par value common shares
("Common Stock") of the Company for $810,000.
As part of the Plan, the Company settled pending litigation with the
Resolution Trust Company (the "RTC") in its capacity as receiver and
conservator of HomeFed Bank, F.S.B. ("HomeFed Bank"), a former subsidiary
of the Company. Under the RTC settlement, the Company paid the RTC
$3,100,000 and the Company received a receivership certificate from the
RTC. The receivership certificate was redeemed by the RTC for $1,402,000
which was paid to HomeFed. The net settlement expense of $1,698,000 is
included as a reorganization item in the 1995 statement of operations.
The RTC settlement provides that the Company is entitled to receive
$850,000 from any tax refunds received by the RTC relating to HomeFed
Bank for years prior to 1992. The Company received $850,000 related to
such tax refunds in January 1998. Thereafter, the Company paid the
entire $850,000 to general unsecured creditors in accordance with the
Plan as described below.
F-7
<PAGE>
Notes to Consolidated Financial Statements, continued
2. Chapter 11 Bankruptcy and Plan of Reorganization, continued:
Also under the Plan, general unsecured creditors, principally the
holders of the convertible subordinated debentures, of which LFC was
the largest holder, received a pro rata share of (i) $16,900,000, (ii)
the Company's rights to the RTC tax refund relating to HomeFed Bank and
the $1,402,000 receivership certificate proceeds, (iii) 1,500,000
shares of Common Stock valued by the Bankruptcy Court at $.30 per share
and (iv) an interest in the litigation trust described below. As a
result of the Company's satisfaction of liabilities subject to
compromise of approximately $127,458,000, the Company recognized a
before tax and after tax extraordinary gain of $108,881,000.
The Plan also provided for the issuance of 5,800,000 new shares of
Common Stock to the pre-effective date stockholders of the Company and the
old shares of common stock (approximately 21,484,000 shares) were canceled.
As a result of shares received as a general unsecured creditor and shares
purchased as described above, LFC owns approximately 41.2% of the Company's
Common Stock, without giving effect to the Common Stock that LFC may
acquire in the future pursuant to the terms of the Convertible Note.
The Company's Restated Certificate of Incorporation contains certain
transfer restrictions with respect to the Company's stock. Generally, such
provisions restrict a person's ability to accumulate 5% or more of the
Company's Common Stock, as well as the ability of a 5% stockholder to
acquire additional shares of Common Stock, in each case, after giving
effect to numerous rules of attribution, aggregation and calculation. In
addition, pursuant to the Plan, the Company is prohibited from issuing any
outstanding shares of stock until July 3, 1999. The Company's Restated
Certificate of Incorporation further prohibits the Company from issuing or
redeeming any shares of stock as long as the Convertible Note is
outstanding. None of the foregoing restrictions will prevent LFC's
exchange of the Convertible Note for Common Stock.
Certain pending claims are being prosecuted by a litigation trust
created for the benefit of the Company's creditors under the Plan.
Pursuant to the Plan, the Company loaned $250,000 to the trust in order to
pay litigation costs. The loan was repaid with interest in 1996.
3. LAND AND REAL ESTATE HELD FOR DEVELOPMENT
A summary of land and real estate held for development by project
follows:
<TABLE>
<CAPTION>
December 31, 1997 Paradise
Valley Silverwood Total
------------ ------------ ------------
<S> <C> <C> <C>
Land $ 7,265,000 $ 2,387,000 $ 9,652,000
============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996 Paradise
Valley Silverwood Total
------------- ------------ ------------
<S> <C> <C> <C>
Land $ 10,811,000 $ 2,257,000 $ 13,068,000
Cost of Completed Residences 460,000 460,000
------------- ------------ ------------
Total $ 11,271,000 $ 2,257,000 $ 13,528,000
============= ============ ============
</TABLE>
F-8
<PAGE>
Notes to Consolidated Financial Statements, continued
3. Land and Real Estate Held for Development, continued:
At December 31, 1996, the total cost of completed residences includes
only project homes.
Interest capitalized in land and real estate held for development
during 1996 and 1995 was $26,000 and $240,000, respectively. No
interest was capitalized in land and real estate held for development
during 1997.
All land and real estate held for development is residential
property in Northern California and is pledged as collateral under
the Convertible Note and construction financing agreements.
4. NOTES PAYABLE
Notes Payable consists of the Convertible Note issued to LFC. The
Convertible Note bears interest at 12% per annum payable quarterly;
however, interest is only paid if the Company has sufficient funds
available, as determined pursuant to the provisions of the loan
agreement. Unpaid interest is added to the principal balance each
quarter. Interest accrued during the years ended December 31, 1997,
1996 and 1995 of $2,208,000, $2,669,000 and $1,208,000, respectively,
was not paid and was added to the principal balance. Additional
interest of $789,000 accrued during 1997 was paid by the Company during
the fourth quarter of 1997. The Convertible Note matures on July 3,
2003. Commencing July 6, 1998, the Convertible Note, including any
accrued interest previously added to the principal balance, may be
exchanged for up to a maximum of 54,400,000 shares of Common Stock,
at a conversion price of $.45 per share. However, the conversion right
is restricted if such conversion would limit the Company's ability to
utilize certain tax benefits. The Convertible Note is collateralized
by all of the Company's assets and has been guarantied by each of the
Company's subsidiaries. The guaranties of the Company's subsidiaries
are collateralized by all of the assets of such subsidiaries. The
balance of the Convertible Note at December 31, 1997 and 1996 was
$26,085,000 and $23,877,000, respectively.
LFC has agreed to provide up to an aggregate of $15,000,000 of
construction financing to certain of the Company's subsidiaries and
their affiliates while the Convertible Note is outstanding. The
construction financing bears interest based on the prime rate, and any
unpaid interest is added to the principal balance at the end of each
month. Interest accrued during the years ended 1996 and 1995 of
$288,000 and $316,000, respectively, was added to the principal balance
during such periods. No interest was accrued on the construction
financing during 1997. Payments of principal and interest on the loans
are payable on demand, and if payments are not made upon demand, the
applicable interest rate is increased by 3% per annum. A payment equal
to 110% of the construction cost of the property being released is
required in order to release property from the construction financing
lien. There were no outstanding balances on the construction financing
loan as of December 31, 1997 and 1996.
F-9
<PAGE>
Notes to Consolidated Financial Statements, continued
4. Notes Payable, continued:
Principal payments required on notes payable are summarized as follows:
1998 $ 325,000
1999 710,000
2000 799,000
2001 900,000
2002 1,012,000
Thereafter 22,339,000
-------------
Total $ 26,085,000
=============
5. INCOME TAXES
The income tax expense for all years presented principally relates to
state franchise taxes. The Company has not recognized any tax benefit
from its operating losses in all years presented.
In 1997, the Internal Revenue Service granted the Company a favorable
ruling on the Company's private letter ruling request and the Company
received permission to reattribute a portion of the net operating losses
from HomeFed Bank, F.S.B. ("HomeFed Bank") and its subsidiaries to the
Company. The amount of net operating loss ("NOL") carryforwards
reattributed was approximately $219,324,000.
The Company and its wholly-owned subsidiaries have NOL carryforwards
available for federal income tax purposes of $252,689,000 as of December
31, 1997, including the NOL's reattributed to the Company by HomeFed Bank
and its subsidiaries. These carryforwards were generated during 1983-1997
and expire during 1998-2012. For state income tax purposes, available NOLs
as of December 31, 1997 total $14,926,000 and expire in 1998-2012.
At December 31, the net deferred tax asset consisted of the following:
1997 1996
------------ ------------
NOL carryforwards $ 89,623,000 $ 11,855,000
Land basis 6,000,000 7,654,000
Other 78,000 92,000
------------ ------------
95,701,000 19,601,000
Valuation allowance (95,701,000) (19,601,000)
------------ ------------
$ 0 $ 0
============ ============
The valuation allowance has been provided on the total amount of the
deferred tax asset due to the uncertainty of future taxable income
necessary for realization of the deferred tax asset. The valuation
allowance increased by $76,100,000 and $725,000 in 1997 and 1996,
respectively.
F-10
<PAGE>
Notes to Consolidated Financial Statements, continued
6. PROVISION FOR LOSSES ON REAL ESTATE INVESTMENTS
For the years ended December 31, 1997 and 1996, the Company recorded
losses at the Paradise Valley project of $153,000 and $1,583,000,
respectively, due to its decision not to complete the home development
on the four detached single-family residential sites as originally
planned and due to the revaluation of the other sites. The loss for
each year was determined by comparing the carrying value of the
investment to its fair value less costs to sell based on offers the
Company has received and sales of comparable real estate.
7. EARNINGS PER SHARE
Basic earnings (loss) per share of Common Stock for all years
presented were calculated by dividing net earnings (loss) by the
10,000,000 shares of Common Stock issued on July 3, 1995. Basic
earnings (loss) per share calculations based upon the pre-effective
date outstanding shares are not meaningful.
Diluted earnings (loss) per share of Common Stock were calculated as
described above and, for the year ended December 31, 1995, also
assumes the Convertible Note had been converted into Common Stock and
earnings increased to eliminate the related interest expense. The
number of shares used to calculate diluted earnings (loss) per share
was 10,000,000, 10,000,000 and 32,496,479 for the years ended December
31, 1997, 1996 and 1995, respectively. The calculation of diluted loss
per share of Common Stock for 1997 and 1996 does not include common stock
equivalents of 54,073,383 and 49,314,276, respectively, which are
antidilutive.
8. COMMITMENTS AND CONTINGENCIES
In 1994 and 1993, one of the Company's consolidated real estate
partnerships entered into two cost sharing agreements with two
California school districts to share in certain improvement costs
which benefit both the project and the school districts. Subject to
certain conditions, the partnership is required to reimburse the
school districts for its share of these improvement costs, currently
estimated at approximately $1,011,000, which are expected to be
recovered through the sale of the property or the development and sale
of finished lots.
The Company's other consolidated real estate partnership placed
approximately $946,000 on deposit with a financial institution in Salt
Lake City, Utah to secure a standby letter of credit. The amount of
the deposit is included in restricted cash. The letter of credit was
issued to guaranty the partnership's obligation under a property
development agreement to construct a recreation center.
One of the Company's wholly-owned subsidiaries, HomeFed Communities,
must continue to maintain a net worth of $5,000,000 and a cash balance
of $400,000 in order to ensure its ability to pay amounts which may
become due under an indemnity agreement with a third-party surety which
provided security for certain obligations of the Brock HomeFed Communities
La Quinta partnership. If HomeFed Communities cannot meet these
requirements, it must post an irrevocable letter of credit in the amount
of 50% of the face value of the bonds issued by the surety. This letter
of credit amount is currently estimated to be approximately $460,000.
F-11
<PAGE>
Notes to Consolidated Financial Statements, continued
9. RELATED PARTY TRANSACTIONS
Pursuant to an Administrative Services Agreement dated March 1, 1996
(the "Administrative Services Agreement"), LFC agreed to provide
administrative services to the Company for an annual fee of $141,000,
payable in monthly installments, through March 1, 1997. After March
1, 1997, the Administrative Services Agreement provides that LFC and
the Company will negotiate in good faith to determine the compensation
to be paid to LFC under the Administrative Services Agreement for
subsequent periods. The Company and LFC have agreed that the fee to
be paid to LFC for the one-year periods beginning March 1, 1997 and
1998 will be $68,274 and $56,101, respectively. Although these
amounts are lower than the fee paid in the initial year, the Company
now pays certain expenses previously paid by LFC. The Administrative
Services Agreement will terminate on March 1, 1999; provided, however,
that LFC may terminate the Administrative Services Agreement prior to
March 1, 1999, upon 30 days written notice, if the Company and LFC are
unable to reach an agreement regarding the compensation to be paid to
LFC for any period. Administrative fees paid to LFC in 1997 and 1996
were $80,000 and $143,000, respectively. Prior to entering into the
Administrative Services Agreement, LFC provided certain administrative
services to the Company for a fee of $142,000 in 1995.
Both of the officers of the Company are officers of LFC and receive
compensation from LFC or Leucadia. The Company's executive offices are
located at 529 East South Temple in Salt Lake City, Utah in an office
building occupied and leased by LFC. LFC provides such office space to the
Company in connection with the services provided to the Company by LFC
pursuant to the Administrative Services Agreement.
On February 27, 1998, the Company purchased 19 lots at the Silverwood
project from LFC for a purchase price of $500,000.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's material financial instruments include cash and cash
equivalents, restricted cash, investments and notes payable. In all
cases, the carrying amount of such financial instruments approximates
their fair values. In cases where quoted market prices are not
available, fair values are based on estimates using present value
techniques.
F-12
<PAGE>
INDEX TO EXHIBITS
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 November 10, 1995
(incorporated by reference to Exhibit 3.2 to the Company's
quarterly report on Form 10-Q for the quarter ended September
30, 1995).
10.1 Letter Agreement dated July 3, 1995 between the Company and
Leucadia Financial Corporation and Second Amended and
Restated Promissory Note dated August 31, 1995 (incorporated
by reference to Exhibit 10.1 to the Company's quarterly
report on Form 10-Q for the quarter ended September 30, 1995).
10.2 Loan Agreement dated July 3, 1995 between the Company and
Leucadia Financial Corporation 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).
10.3 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).
10.4 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).
<PAGE>
10.5 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).
10.6 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).
10.7 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).
10.8 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).
21 * Subsidiaries of the Company.
27 * Financial Data Schedule.
* Filed with this report
<PAGE>
EXHIBIT 21
----------
Subsidiaries of HomeFed Corporation (the "Registrant")
Percentage of
Outstanding
Place of Stock Held by
Name of Subsidiary Incorporation the Registrant
- ------------------- ------------- ---------------
HomeFed Communities, Inc. California 100%
HomeFed Resources Corporation California 100%
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from the
financial statements contained in the body of the accompanying Form 10-K and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 4,195
<SECURITIES> 75
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 15,457
<CURRENT-LIABILITIES> 0
<BONDS> 26,085
0
0
<COMMON> 100
<OTHER-SE> (10,839)
<TOTAL-LIABILITY-AND-EQUITY> 15,457
<SALES> 4,011
<TOTAL-REVENUES> 4,330
<CGS> 4,048
<TOTAL-COSTS> 4,048
<OTHER-EXPENSES> 677
<LOSS-PROVISION> 153
<INTEREST-EXPENSE> 2,997
<INCOME-PRETAX> (3,545)
<INCOME-TAX> 32
<INCOME-CONTINUING> (3,577)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,577)
<EPS-PRIMARY> (.36)
<EPS-DILUTED> (.36)
</TABLE>
