As filed with the Securities and Exchange Commission on July 21, 1999
Registration No. 333 - 79901
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-2
AMENDMENT NO. 1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
HOMEFED CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 33-0304982
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
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PAUL J. BORDEN
1903 WRIGHT PLACE 1903 WRIGHT PLACE
SUITE 220 SUITE 220
CARLSBAD, CALIFORNIA 92008 CARLSBAD, CALIFORNIA 92008
(760) 918-8200 (760) 918-8200
(Address, including zip code and telephone number, (Name, address, including zip code, and
including area code of registrant's principal executive telephone number,
offices) including area code, of agent for service)
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Copies to:
STEPHEN E. JACOBS, ESQ.
WEIL, GOTSHAL & MANGES LLP
767 FIFTH AVENUE
NEW YORK, NEW YORK 10153
(212) 310-8000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED
SALE TO THE PUBLIC: As soon as practicable after the
effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), please check the following box. [ ]
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1)
of this Form, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] ______________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ] ____________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, please check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ] ____________
If the delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE PRICE (1) REGISTRATION FEE (2)
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Common Stock,
par value $.01 per share.... 50,675,812 N/A $25,337,906 $7,044
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(1) Estimated pursuant to Rule 457(c), solely for the purpose of calculating
the registration fee, based on the average of high and low prices reported
in the consolidated reporting system, as set forth in the OTC Daily
Trading Summary, on May 27, 1999.
(2) The registration fees have been calculated pursuant to Section 6(b) of the
Securities Act of 1933, as follows: $0.50, the average of high and low
prices reported on May 27, 1999, multiplied by 50,675,812, the number of
shares registered hereby, multiplied by .000278.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY
DETERMINE.
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#449676 v15
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The information in this prospectus is incomplete and may be changed. We may not
distribute these securities until the Registration Statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
Subject to completion, dated July 21, 1999
PROSPECTUS
50,675,812 SHARES
HOMEFED CORPORATION
COMMON STOCK
o For each common share of Leucadia National Corporation that you owned
on August 25, 1998, you will receive approximately 0.79 shares of
HomeFed common stock in the distribution.
o You will not have to pay for the HomeFed common stock you receive,
will not have to surrender any Leucadia common shares, and will not
have to take any other action in order to receive the HomeFed common
stock.
o There will be no proceeds from the distribution.
HomeFed common stock is traded in the over-the-counter market under
the symbol "HFDC" and is not listed on any stock exchange.
HOMEFED COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. PLEASE SEE "RISK
FACTORS" BEGINNING ON PAGE 4.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR
DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
July 21, 1999.
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TABLE OF CONTENTS
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SUMMARY INFORMATION -- Q&A..............................................................................1
RISK FACTORS............................................................................................4
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION.....................................................13
USE OF PROCEEDS........................................................................................14
PRICE RANGE OF HOMEFED COMMON STOCK AND DIVIDEND INFORMATION...........................................14
CAPITALIZATION.........................................................................................15
SELECTED FINANCIAL DATA................................................................................16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..................18
THE DISTRIBUTION.......................................................................................24
OUR COMPANY............................................................................................29
MANAGEMENT.............................................................................................34
CERTAIN TRANSACTIONS...................................................................................36
DESCRIPTION OF HOMEFED COMMON STOCK....................................................................39
THE TRUST..............................................................................................42
VALIDITY OF SHARES.....................................................................................42
EXPERTS................................................................................................42
WHERE YOU CAN GET ADDITIONAL INFORMATION...............................................................42
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SUMMARY INFORMATION -- Q&A
WHO IS HOMEFED?
HomeFed invests in and develops residential real estate projects in California.
Its principal executive offices are located at 1903 Wright Place, Suite 220,
Carlsbad, California 92008 and its telephone number is (760) 918-8200.
WHAT IS BEING DISTRIBUTED?
50,675,812 shares of HomeFed common stock will be distributed, representing
approximately 89.6% of the 56,557,826 outstanding shares of HomeFed common
stock.
WHO IS ENTITLED TO THE DISTRIBUTION?
The HomeFed common stock will be distributed to you and other Leucadia National
Corporation shareholders. This means that if you held Leucadia common shares on
August 25, 1998, you will be entitled to a distribution, even if you do not own
any Leucadia common shares now or on the date of the distribution.
HOW MANY SHARES OF HOMEFED COMMON STOCK WILL I RECEIVE?
You will receive approximately 0.79 shares of HomeFed common stock for each
Leucadia common share you owned on August 25, 1998. You will not receive
fractional shares. If the number of shares issued to you would include a
fraction of a share, you will receive an amount in cash instead of the
fractional share.
DO I HAVE TO DO ANYTHING TO RECEIVE HOMEFED COMMON STOCK IN THE DISTRIBUTION?
No. You will not have to pay any money, surrender any Leucadia common shares or
do anything else in order to receive HomeFed common stock in the distribution.
WHO IS MAKING THE DISTRIBUTION?
The distribution is being made by a trust formed by Leucadia for your benefit,
as a Leucadia shareholder on August 25, 1998. The trust holds all of the
50,675,812 shares of HomeFed common stock to be distributed in the distribution.
The sole business of the trust is to hold this HomeFed common stock and to
distribute this HomeFed common stock to you and the other Leucadia shareholders.
HOW DID THE TRUST GET HOMEFED COMMON STOCK?
The trust acquired 4,117,986 shares of HomeFed common stock, agreements to
purchase an aggregate of 46,557,826 new shares of HomeFed common stock and the
$1,670,100 unpaid portion of the purchase price for these shares from Leucadia.
On July 8, 1999, the trust purchased the 46,557,826 new shares of HomeFed common
stock pursuant to these stock purchase agreements.
WHEN WILL THE DISTRIBUTION TAKE PLACE?
We will mail certificates for your shares of HomeFed common stock as soon as
possible after the date of this document.
WHY DIDN'T THE DISTRIBUTION TAKE PLACE IN AUGUST 1998?
Under the terms of HomeFed's bankruptcy plan of reorganization, which became
effective on July 3, 1995, HomeFed could not issue any stock under the stock
purchase agreements until after July 3, 1999. Therefore, a direct distribution
of HomeFed common stock to Leucadia shareholders in August 1998 was not
possible.
WHAT IS THE REASON FOR THE DISTRIBUTION?
The distribution is being made as part of a series of transactions to protect
HomeFed's significant tax benefits.
In August 1998, HomeFed needed equity financing to permit it to take advantage
of the opportunity to become development manager of San Elijo Hills, a real
estate development project in southern California owned by Leucadia. At that
time, Leucadia owned 41.2% of the HomeFed common stock, and was willing to
purchase additional HomeFed common stock. HomeFed was willing to sell HomeFed
common stock to Leucadia, so long as doing so did not jeopardize HomeFed's
significant net operating tax loss carryovers. The benefits of these tax loss
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carryovers could have been adversely affected if too large a change in ownership
of HomeFed common stock occurred at any time during any three-year period.
Leucadia agreed to increase its equity interest in HomeFed in a manner that
would not jeopardize HomeFed's tax benefits, so long as doing so did not also
restrict Leucadia's ability to issue and/or repurchase its own securities. Under
federal tax laws, as long as Leucadia owned HomeFed common stock, any issuances
or repurchases by Leucadia of its own shares would be treated as a corresponding
proportionate change in ownership of HomeFed common stock.
To accommodate these tax considerations, as well as the restrictions on our
ability to issue shares until after July 3, 1999, Leucadia contributed its
interests in HomeFed to the trust and distributed by dividend to Leucadia
shareholders all of the interests in the trust. As a result, transactions in
Leucadia's stock were unlinked from having any effect on HomeFed's tax benefits.
WHAT WILL HAPPEN TO THE TRUST AFTER THE DISTRIBUTION?
The trust agreement provides that the trust will terminate when the HomeFed
common stock is distributed to you and the other Leucadia shareholders.
WILL THE DISTRIBUTION BE TAXABLE?
No. The dividend by Leucadia of interests in the trust resulted in a taxable
dividend of $0.1426 for each Leucadia common share owned by you on August 25,
1998. The distribution of HomeFed common stock from the trust will not result in
any additional tax to you.
WILL LEUCADIA HAVE ANY RELATIONSHIP WITH HOMEFED FOLLOWING THE DISTRIBUTION?
Yes. Following the distribution, HomeFed and Leucadia will continue to have
relationships as a result of agreements entered into and facts existing prior to
the distribution. These include:
o Leucadia Financial Corporation, a subsidiary of Leucadia, is the holder
of HomeFed's $26,500,000 principal amount collateralized note, which is
carried in our financial statements at $20,300,000. Accordingly,
Leucadia Financial is HomeFed's principal creditor.
o Leucadia Financial provides administrative services to HomeFed,
including the services of HomeFed's President and its
Secretary/Treasurer.
o HomeFed is the development manager for the San Elijo Hills residential
real estate project. That project is owned by San Elijo Hills
Development Company, LLC, a subsidiary of Leucadia.
o San Elijo Hills Development Company has agreed to purchase or to
designate an affiliate, such as Leucadia, to purchase approximately
$66,100,000 of bonds to be issued by the City of San Marcos, California
Redevelopment Agency. These bonds will provide a substantial portion of
the financing that will be used to build infrastructure and school
facilities serving the San Elijo Hills project.
o Leucadia is an investor in Otay Land Company, LLC, a subsidiary of
HomeFed that owns land in southern California. Otay Land Company's net
income, if any, will be distributed only to Leucadia, until Leucadia
has been paid back its $10,000,000 preferred capital investment,
together with a 12% return on its investment. Until Leucadia has been
paid in full, we will not receive any distribution from Otay.
o Four of HomeFed's six directors are executive officers of Leucadia or
its subsidiaries, and two of these directors, Ian M. Cumming and Joseph
S. Steinberg, are directors and principal shareholders of Leucadia. Mr.
Cumming is also Chairman of Leucadia and Mr. Steinberg is President of
Leucadia.
WILL HOMEFED PAY DIVIDENDS ON ITS STOCK?
No. HomeFed does not anticipate paying dividends in the foreseeable future.
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WILL THE HOMEFED COMMON STOCK BE LISTED ON A STOCK EXCHANGE?
No. HomeFed common stock is not listed on a stock exchange. Trading in HomeFed
common stock takes place in the over-the-counter market. We cannot assure you
that an active trading market in the shares will develop after the distribution.
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RISK FACTORS
Owning our stock involves risks. You should carefully consider the
following risk factors, as well as the other information contained in this
prospectus. Additional risks not presently known to us or that we currently deem
immaterial also may impair our business operations. In addition, this prospectus
contains forward-looking statements that involve risks and uncertainties.
RISKS RELATING TO OUR BUSINESS
OUR LIMITED OPERATING HISTORY MAKES IT DIFFICULT TO EVALUATE OUR BUSINESS.
HomeFed came out of bankruptcy in July 1995. As a result, we have a
limited operating history on which you can base your evaluation of our business
and prospects. We have been in the business of developing California real estate
since our founding in 1988. However, since August 1998 the focus of our business
has changed from the sale to homebuilders of developed and undeveloped lots in
bulk to the development of master planned communities. As a result, we expect
that our future revenues will be derived from management fees and profit
participations related to the development of master planned communities rather
than the sale of developed and undeveloped lots. However, we cannot assure you
that we will not engage in other activities or businesses that may be unrelated
to our current business.
WE HAVE A HISTORY OF LOSSES AND EXPECT TO SUSTAIN LOSSES IN THE FUTURE.
We have had net losses since emerging from bankruptcy in 1995. For the
quarter ended March 31, 1999, we had a net loss of approximately $1,400,000 and
for the year ended December 31, 1998, we had a net loss of approximately
$4,300,000. We had an accumulated deficit of approximately $9,400,000 at March
31, 1999.
OUR EXISTING DEBT MAY ADVERSELY AFFECT OUR FINANCIAL AND OPERATING FLEXIBILITY.
As of March 31, 1999, we had borrowed $26,500,000 from Leucadia
Financial. All of our assets are pledged to collateralize this borrowing. This
has important consequences for us, including:
o cash of approximately $1,600,000 per year from operations or
other sources will be required to make annual debt service
payments prior to maturity of this debt;
o our ability to borrow additional amounts for working capital,
debt service requirements, capital expenditures or
acquisitions is limited;
o our ability to capitalize on significant business
opportunities may be limited and our flexibility to react to
changes in competitive pressures and general economic
conditions may be reduced;
o we could be at a competitive disadvantage with respect to less
highly leveraged companies with which we compete; and
o we may be more vulnerable in the event of a downturn in the
economy or a disruption in our business.
It is unlikely that we will be able to obtain additional financing at
favorable rates or at all from sources other than Leucadia Financial because all
of our assets are pledged to Leucadia Financial. If we cannot achieve operating
profitability or positive cash flows from operating activities, we may not be
able to meet our debt service or working capital requirements.
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THERE IS RISK IN THE LIMITED NATURE OF OUR OPERATIONS.
Our operations principally consist of two real estate development
projects, San Elijo Hills and Otay Ranch. The San Elijo Hills project is a
master planned community of approximately 3,400 homes and apartments, as well as
commercial properties located in the City of San Marcos, San Diego County,
California. Our Otay Ranch project consists of seven separate non-adjoining
parcels totaling 4,800 acres within the larger Otay Ranch master planned
community located south of San Diego. We describe these projects more fully
under the caption "Our Company."
The Company has not received any revenue from these projects to date.
The San Elijo Hills project is actively being developed. As development manager
of the San Elijo Hills project, we are entitled to receive marketing, field
overhead and management service fees from gross revenues generated by the
project. These fees are expected to cover our cost of providing services to the
project. San Elijo Hills has contracts to sell approximately 735 lots to various
builders for a total consideration of $104,000,000. If these sales occur, we
will receive fees of approximately $7,280,000 for these services. While we
expect that some of these sales will occur in 1999, we cannot assure you that
any of these sales will actually occur. We are also entitled to a success fee if
this project generates sufficient profits. We do not anticipate that we will be
paid any success fee in 1999. The fees that we may earn from the San Elijo Hills
project are described under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations." In October 1998, we acquired our
interest in the Otay Ranch project and are investigating how to develop this
project. We do not anticipate that the Otay Ranch project will generate revenues
in 1999.
THERE IS RISK IN OUR GEOGRAPHIC CONCENTRATION.
Because our development activities consist exclusively of two projects
in southern California, our business depends to a significant degree on
relocation by Californians and residents of other states and countries to
southern California, in addition to other local market conditions. The
concentration of our business in southern California and the fact that the San
Elijo Hills project is our only project currently in development increase our
vulnerability to regional economic downturns or other events that have a
negative effect on our projects. A decline in the California economy could also
have an adverse effect on our financial condition.
FLUCTUATING OPERATING RESULTS MAY AFFECT THE MARKET PRICE OF OUR STOCK.
Because our real estate projects are long term in nature, our business
cycle does not correspond to our fiscal year or other reporting periods. As a
result, our fiscal year operating results are likely to vary from period to
period, even if we were to have a successful project operating as planned, and
could vary significantly over the life of any given project.
A community may generate strong operating results when first presented
for sale, whether because of local pent-up demand or other reasons. However,
during later periods over the life of the same community, periods of weaker
results may occur. In addition to external factors, our revenues and earnings
are affected by the volume and price of lots that we bring to market at any
given point in time, which reflect, in part, our strategy of developing
communities in phases. As a result, the timing and amount of revenues and
profits are subject to considerable variation and uncertainty. Because we have
two projects, only one of which is in active development, the impact on our
earnings and cash flow of the San Elijo Hills project is not and, in the future,
may not be, balanced by results of other operations, which could have a
moderating effect on the variability of our results.
OUR CASH FLOW IS DEPENDENT UPON THE SUCCESS OF THE SAN ELIJO HILLS PROJECT.
As development manager of the San Elijo Hills project, we will receive
marketing, field overhead and management service fees from the project, which
are expected to cover our costs of providing services to this project. Our
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ability to fund the cost of providing services to the San Elijo Hills project
after 1999 will depend significantly upon the receipt of fees under the San
Elijo Hills development agreement. If the project generates sufficient income,
we will also earn a success fee out of the project's net cash flow, up to a
maximum amount. All of this is described under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations." We
are dependent upon the cash flow, if any, generated by the San Elijo Hills
project as our principal source of funds in the future.
FAILURE TO OBTAIN FINAL ENVIRONMENTAL APPROVAL OF THE SAN ELIJO HILLS PROJECT
COULD AFFECT OUR RESULTS OF OPERATIONS.
The San Elijo Hills project is subject to final municipal and court
approvals of an environmental impact report. A draft of the report is under
review by the municipality. Pending finalization and approval of that report by
the municipality and the court, the project may be delayed or stopped. We cannot
predict when the municipality and the court will act on the report or whether
the report will be approved. If the report is not approved, the San Elijo Hills
project could be substantially delayed or operations could be permanently
closed, delaying or eliminating our fee income and/or profit participation from
the San Elijo Hills project. Because we have no other projects in active
development, if this happens, we could have difficulty meeting our debt service
and working capital requirements.
THE SAN ELIJO HILLS PROJECT'S LOCATION NEXT TO A LANDFILL AND RESOURCE RECOVERY
FACILITY MAY AFFECT THE PROFITABILITY OF THE PROJECT.
The San Elijo Hills community is located next to the San Marcos
Landfill and the North County Resource Recovery Facility. The landfill ceased
accepting waste on March 11, 1997 and its owner is preparing and processing a
landfill closure plan with regulatory agencies. The resource recovery facility
is not presently processing solid waste and the facility owner lacks a permit
from the city that would be needed to operate the facility. The owners of these
facilities will provide landscaping and gas collection measures for these sites.
We cannot assure you that the landscaping and gas collection measures will be
adequate to counteract any quality of life issues resulting from the project's
proximity to these sites. As a result, we cannot assure you that the presence of
the closed landfill or the unused facility will not have a negative effect on
sales of property at San Elijo Hills. A reduced ability to sell property at San
Elijo Hills would reduce the fees payable to us as development manager of that
project.
THE PROFITABILITY OF THE SAN ELIJO HILLS PROJECT COULD BE ADVERSELY AFFECTED BY
THE OBLIGATION OF SAN ELIJO HILLS DEVELOPMENT COMPANY, THE PROJECT OWNER, TO
PURCHASE CITY OF SAN MARCOS REDEVELOPMENT BONDS.
A substantial portion of the financing for both infrastructure and
school facilities serving the San Elijo Hills project is expected to be provided
by approximately $66,100,000 principal amount of bonds to be issued by the City
of San Marcos Redevelopment Agency. These bonds can be sold to the public; if
not, the project owner, which is a subsidiary of Leucadia, will be required to
purchase the bonds. The project owner may also designate an affiliate, which
could be Leucadia, to purchase the bonds. Approximately $37,000,000 of the
proceeds received from the issuance of the bonds will be used to reimburse the
project owner for project infrastructure and school site costs.
If the public offering of these bonds is not successful and the project
owner is required to buy these bonds, we have no ability to control whether the
project owner will designate an affiliate to make the required purchases.
Leucadia has the sole ability to make this determination. If the project owner
buys these bonds, it is expected that the project owner will borrow funds from
Leucadia in order to finance the purchase. Under the terms of the San Elijo
Hills development agreement, all indebtedness to Leucadia in connection with the
project must be repaid before any success fee is paid to HomeFed. As a result,
the project's cash flow will be required to service the additional debt to
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Leucadia and, until that additional debt is repaid, we will not receive any
success fee. This additional outlay of cash flow by the project could have an
adverse effect on our ability to service our existing debt and to meet our
working capital requirements.
THE FAILURE OF THE CITY OF SAN MARCOS TO ESTABLISH A COMMUNITY FACILITIES
DISTRICT FOR THE SAN ELIJO HILLS PROJECT COULD DELAY DEVELOPMENT OF THE PROJECT
AND ADVERSELY AFFECT ITS PROFITABILITY.
The City of San Marcos has agreed to complete proceedings to establish
a Community Facilities District that will issue tax supported public bonds to
finance neighborhood improvements in the San Elijo Hills project. These bonds
are different from the redevelopment agency bonds referred to above. We
currently anticipate that the community facilities district will be considered
by the City of San Marcos in the third quarter of 1999 and, if approved, will be
formed and bonds will be authorized in the fourth quarter of 1999. If the City
of San Marcos approves a district on terms that are not acceptable to San Elijo
Hills or delays beyond March 15, 2000 formation of the district and
authorization for these bonds, the profitability of the project will be
adversely affected because:
o development of the project would be significantly delayed;
o future lot prices could be reduced; and
o the project owner would not be able to deliver lots in
accordance with the terms of those contracts that require the
community facilities district be formed as contemplated by
those contracts. This could result in reduction of the
contract price, delays in the closing, or the termination of
these contracts.
If the profitability of the project is reduced, or the timing of sales is
delayed, fees payable to us as development manager of the project could be
deferred, reduced or eliminated. This could have an adverse effect on our
ability to service our debt and to meet our working capital requirements.
FAILURE BY OTHER OWNERS OR DEVELOPERS TO DEVELOP THE LARGER OTAY RANCH PLANNING
AREA COULD AFFECT THE ULTIMATE PROFITABILITY OF OUR INVESTMENT IN OTAY LAND
COMPANY.
Our property in the larger Otay Ranch planning area consists of 1,200
acres of developable land and 3,600 acres of non-developable land. It is part of
the 22,900-acre master planned community being developed by several other
developers. If any or all of these other developers delay development of, or
fail to develop, their properties:
o we may be restricted in how we can market our property;
o the cost of development of our developable property may be
increased; or
o the development of our developable property may be delayed or
may become uneconomical.
CONTROL OF HOMEFED BY TWO INDIVIDUALS WILL REDUCE OTHER STOCKHOLDERS' ABILITY TO
CONTROL OUR BUSINESS.
Following the distribution, Messrs. Ian M. Cumming and Joseph S.
Steinberg and their families and related trusts will, together, own
approximately 28.1% of our common stock. Accordingly, they may be able to elect
a majority of the directors and control our management and affairs. This will
reduce other stockholders' ability to control our business. In addition, Messrs.
Cumming and Steinberg are principal shareholders, directors and the Chairman and
President, respectively, of Leucadia.
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WE DO NOT INTEND TO PAY DIVIDENDS ON OUR COMMON STOCK.
We have not paid cash dividends on our common stock since emerging from
bankruptcy and do not anticipate paying cash dividends in the foreseeable
future. We intend to retain any cash flow to pay expenses, meet debt service
requirements and provide for the development and growth of our company.
WE CANNOT PREDICT WHETHER A LIQUID MARKET FOR OUR COMMON STOCK WILL DEVELOP
AFTER THE DISTRIBUTION.
Our common stock has been traded in the over-the-counter market, and is
listed on the OTC Bulletin Board under the symbol "HFDC." The market for our
common stock is very limited due to the low trading volume and our understanding
that no brokerage firms act as market makers for our stock. Since January 1,
1999, a total of 206,100 shares of our common stock were traded according to
Nasdaq Trading and Market Services. We cannot assure you that an active trading
market for our common stock will develop or, if an active market does develop,
the depth of the trading market for the common stock and whether or not it will
continue. As a result, the ability to buy and sell shares of our common stock
may be limited. Unless an orderly market in HomeFed common stock develops, the
price at which the stock trades may fluctuate significantly and may be higher or
lower than the price that would be expected for an established issue. The price
of HomeFed common stock will be determined in the marketplace and may be
influenced by many factors, including:
o the depth and liquidity of the market for HomeFed common
stock;
o developments affecting our business generally;
o our dividend policy;
o investor perception of our business and the real estate
development industry generally; and
o general economic and market conditions.
OUR ABILITY TO USE OUR NET OPERATING LOSS CARRYOVERS, AS WELL AS THE BENEFIT
FROM THESE LOSS CARRYOVERS, COULD BE LIMITED.
At December 31, 1998, we had net operating loss carryovers of
approximately $266,245,000 available to reduce our future federal income tax
liabilities. Approximately $1,000,000 of these net operating loss carryovers
will expire if not used in 1999. If we earn taxable income that would permit us
to use our loss carryovers, the benefit to us may be reduced because we are
subject to the alternative minimum tax rate of 20%.
Our ability to use these loss carryovers could be lost if we were to
experience more than a 50% change in ownership over any three-year period, all
as defined and governed by Section 382 of the Internal Revenue Code. Although
the trust's purchase of HomeFed common stock and its distribution to you will
not result in a prohibited change in ownership for tax purposes, additional
future changes, when combined with the significant ownership change that
occurred as a result of the trust's purchase, could result in the application of
the tax loss limitation rules. If we were to lose the benefits of these loss
carryovers, any future earnings and cash resources would be materially and
adversely affected.
RESTRICTIONS IN OUR CHARTER ON YOUR ABILITY TO BUY OUR COMMON STOCK COULD REDUCE
THE MARKET VALUE OF OUR COMMON STOCK.
In order to protect our tax loss carryovers, our common stock is
subject to transfer restrictions contained in our restated certificate of
incorporation. These restrictions are designed to stop anyone from becoming a
five percent stockholder, as that term is defined in federal treasury
regulations, without approval of our board of directors. If a stockholder
8
<PAGE>
attempts to buy stock that would result in that stockholder becoming a five
percent stockholder without approval of the board of directors:
o the stock purchase will only be permitted to the extent the
buyer does not become a five percent stockholder;
o any additional shares that were intended to be purchased will
be sold; and
o the net proceeds from that sale will be used to repay the
attempted buyer for the purchase price for the shares that
were not permitted to be purchased.
This restriction could reduce the market value of our common stock.
ANTI-TAKEOVER PROVISIONS OF DELAWARE LAW AND OUR TRANSFER RESTRICTIONS COULD
IMPEDE OR DISCOURAGE A THIRD-PARTY ACQUISITION OF OUR COMPANY.
HomeFed is a Delaware corporation. Anti-takeover provisions of Delaware
law impose various impediments to the ability of a third party to acquire
control of our company, even if a change in control would be beneficial to our
existing stockholders. Our incorporation under Delaware law, as well as the
restrictions on transferability of our common stock contained in our restated
certificate of incorporation, could impede a merger, takeover or other business
combination involving our company or discourage a potential acquiror from making
a tender offer for our common stock.
This could reduce the market value of our common stock.
PROPERTY IN CALIFORNIA IS AT RISK FROM EARTHQUAKES.
Although research on earthquake prediction has increased in recent
years, it cannot be predicted when and where an earthquake will occur. We do not
intend to obtain earthquake insurance for our projects unless required. An
earthquake could cause structural damage or destroy our projects, which could
have an adverse financial impact on us.
UNDER CALIFORNIA LAW WE COULD BE LIABLE FOR SOME CONSTRUCTION DEFECTS IN HOMES
BUILT ON LAND THAT WE DEVELOP.
California law imposes some liabilities on developers of land on which
homes are built. Although we do not expect to build homes ourselves, we are
involved in the planning and construction of infrastructure improvements and
grading of the entire site. Grading will include cuts, fills and the
construction of slopes. Future construction defect litigation could be based on
a strict liability theory based on our involvement in the project or it could be
related to infrastructure improvements or grading. We maintain insurance and
require that our contractors and home builders also maintain insurance. However,
we can not assure you that this insurance will be adequate to cover all risks.
RISKS RELATING TO OUR INDUSTRY
WE MAY BE AFFECTED BY REAL ESTATE, ECONOMIC AND OTHER CONDITIONS GENERALLY.
The real estate industry can be volatile and is affected by changes in
national, global and local economic conditions. We may also be affected by
events such as employment levels, availability of financing, interest rates,
consumer confidence and the demand for housing and other types of construction.
We are subject to various risks, many of which are outside our control,
including:
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<PAGE>
o real estate market conditions both in southern California,
where our communities are located, and in areas where
potential customers reside;
o decreased consumer spending for housing;
o changing demographic conditions;
o competitive overbuilding;
o adverse weather conditions and natural disasters, such as
earthquakes, mudslides, landslides, hurricanes, tornadoes and
wildfires;
o delays in construction schedules and cost overruns;
o changes in government regulations or requirements;
o increases in real estate taxes and other local government
fees; and
o availability and cost of land, materials and labor.
A negative development caused by any of these factors could have a
material adverse effect on our financial condition.
OUR BUSINESS IS SENSITIVE TO INTEREST RATES AND THE ABILITY OF CONSUMERS TO
OBTAIN MORTGAGE FINANCING.
The builders who purchase land from us generally sell that land with
buildings or other improvements to purchasers of homes. The ability of these
ultimate buyers to finance their purchases is generally dependent on their
personal savings and availability of third party financing. As a result, demand
for housing and consequently, the land that we sell, will be adversely affected
by increases in interest rates, unavailability of mortgage financing, increasing
housing costs and unemployment levels. Levels of income and savings, including
retirement savings, available to home purchasers can be affected by declines in
the capital markets. If mortgage interest rates increase or the capital markets
decline or undergo a major correction, the ability of prospective buyers to
purchase homes will be adversely affected. This may affect our customers' sales
and have an adverse effect on our financial condition.
WE FACE SIGNIFICANT COMPETITION FROM OTHER REAL ESTATE DEVELOPERS AND
HOMEBUILDERS, WHICH MAY HAVE AN ADVERSE EFFECT ON OUR FINANCIAL CONDITION.
Our planned community development and other real estate operations face
substantial competition. Some of our current and potential competitors have
longer operating histories and greater financial, sales, marketing, technical
and other competitive resources. Competition may have an adverse effect on our
financial condition.
INCREASED DEVELOPMENT COSTS MAY BE BEYOND OUR CONTROL.
Changes in development plans and specifications, delays due to
compliance with governmental requirements or imposition of fees not yet levied,
or other delays resulting from adverse weather, strikes or energy shortages,
shortages of material for construction, inflation, environmental, zoning, title
or other legal matters, as well as other unknown contingencies could cause
development costs to exceed the amounts produced by any project. In the event
that costs exceed funds available, our ability to complete development of
projects or to otherwise perform our commitments under development agreements
will depend upon our ability to supply additional funds. We cannot assure you
that we will have adequate funds available for that purpose. Because we are
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<PAGE>
largely funded by borrowings, any delays in development may have an adverse
impact on the cash flow and long-term success of HomeFed.
THE EXTENDED TIME FRAME FROM THE DATE OF AN INVESTMENT IN A PROJECT UNTIL ITS
EXPECTED PROFITABILITY MAKES OUR BUSINESS RISKY.
Our communities will be developed over time. Therefore, our medium- and
long-term profitability will be dependent on our ability to develop and market
our projects successfully. Committing the financial and managerial resources to
develop a community involves significant risks. Before a community generates any
revenues, material expenditures are required, among other things, to obtain
development approvals, to construct project infrastructure, recreation centers,
model homes and sales facilities and, where opportunities are suitable and
appropriate, to acquire land. It generally takes several years for a community
under development to achieve cumulative positive cash flow. We cannot assure you
that we will be able to successfully develop and market our communities. An
inability to develop and market our communities successfully and to generate
positive cash flows from these operations in a timely manner would have an
adverse effect on our ability to service debt and to meet our working capital
requirements.
UNINSURED LOSSES COULD CAUSE US TO LOSE ALL OR PART OF OUR INVESTMENT IN OUR
PROJECTS.
Insurance against certain risks, such as earthquakes and/or floods, may
be unavailable or only available at very high rates or in amounts that are less
than the full market value or replacement cost of our projects. In addition,
there can be no assurance that particular risks that are currently insurable
will continue to be insurable on an economical basis or that current levels of
coverage will continue to be available. If a loss occurs that is partially or
completely uninsured, we could lose all or part of our investment.
LAWS AND GOVERNMENTAL REGULATIONS MAY DELAY COMPLETION OF OUR PROJECTS AND
IMPOSE LIABILITY FOR HAZARDOUS MATERIALS PRESENT ON OUR PROPERTIES.
Our business is subject to extensive federal, state and local
regulation. Governmental agencies have broad discretion in administering these
regulations, including "no growth" or "slow growth" policies. This can prevent,
delay or significantly increase the costs of our developments. Compliance with
environmental regulations may significantly increase the costs of our projects.
Various governmental approvals and permits are required throughout the
development process, and we cannot assure you that we will receive or will
receive in a timely fashion these approvals or permits. If we incur substantial
compliance costs or delays and other regulatory burdens this could have a
material adverse effect on our operations.
Various federal, state and local laws subject property owners or
operators to liability for the costs of removal or remediation of certain
hazardous substances released on a property. These laws often impose liability
without regard to whether the owner knew of, or was responsible for, the release
of the hazardous substances. Although we will try to become aware of any
environmental problem with regard to any property before committing to manage or
acquire it, the occurrence of health problems or other dangerous conditions
caused by other work on the property may only become apparent after a lengthy
period of time. As a result, we cannot assure you that there are no
environmental risks with respect to any properties that we own or manage. The
presence of any of these hazardous substances at one or more of our properties,
and responsibility for the removal or remediation of any substances, may result
in significant cost to us.
In addition, the construction of improvements on property that we own
or manage may be adversely affected by regulatory, administrative, enforcement
or requirements of local, state or federal agencies affecting the use of the
property for its intended purpose including, without limitation, habitat
conservation or the protection of threatened or endangered species of plants and
animals, and land use controls. Restrictions may also relate to air and water
quality standards, noise pollution and indirect environmental impacts, such as
11
<PAGE>
increased motor vehicle activity. Changes in policies may result in substantial
delays or the imposition of new conditions or restrictions on the ability to
obtain permits and approvals for a project, which could have a material adverse
effect on our operations.
DAMAGE TO PROPERTY OR CONDEMNATION CREATES RISKS IN OWNING OR DEVELOPING
PROPERTY.
During the term of a project, the property that we own or manage may be
damaged. We, or the project owner, could incur liability in connection with the
improvement of the property, or all or a portion of the property could become
subject to an eminent domain or inverse condemnation action.
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<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
The statements contained or incorporated by reference in this
prospectus that are not historical facts are "forward-looking statements," as
that term is defined in the Private Securities Litigation Reform Act of 1995.
These statements include all discussions of strategy as well as statements that
contain forward-looking expressions such as "believe," "estimate," "expect,"
"intend," "may," "will," "should," or "anticipate." In addition, from time to
time, we or our representatives have made or may make forward-looking
statements, orally or in writing. Furthermore, forward-looking statements may be
included in our filings with the SEC as well as in press releases or oral
presentations made by or with the approval of one of our authorized executive
officers.
We caution you to bear in mind that forward-looking statements, by
their very nature, involve assumptions and expectations and are subject to risks
and uncertainties. Although we believe that the assumptions and expectations
reflected in the forward-looking statements contained in this prospectus are
reasonable, no assurance can be given that those assumptions or expectations
will prove to have been correct. Important factors that could cause actual
results to differ materially from our expectations are disclosed in this
prospectus, including under the caption "Risk Factors." These factors include,
but are not limited to, the following:
o deteriorating general economic conditions in the United States
or in southern California, in particular, because that is
where our current projects are located,
o decreased consumer spending, particularly among those
consumers who drive sales by builders that comprise our
primary customer base, and
o increased competition from other developers, including
developers with more resources than we have.
All subsequent written and oral forward-looking statements attributable
to us or persons acting on our behalf are expressly qualified in their entirety
by these factors and the cautionary statements contained throughout this
prospectus. Additional information on factors that may affect the business and
financial results can be found in our filings with the SEC. All forward-looking
statements should be considered in light of these risks and uncertainties. We
assume no responsibility to update forward-looking statements made in this
prospectus unless otherwise required by law.
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<PAGE>
USE OF PROCEEDS
None of HomeFed, the trust formed for Leucadia shareholders, or
Leucadia will derive any proceeds from this distribution of HomeFed common
stock.
PRICE RANGE OF HOMEFED COMMON STOCK AND DIVIDEND INFORMATION
The following table sets forth for the periods indicated the high and
low sales price of HomeFed common stock.
<TABLE>
<CAPTION>
High Low
------------------- ------------------
<S> <C> <C>
Year ended December 31, 1997
First Quarter $ 0.50 $ 0.03125
Second Quarter 0.375 0.0625
Third Quarter 0.375 0.0625
Fourth Quarter 0.375 0.0625
Year ended December 31, 1998
First Quarter $ 0.3125 $ 0.0625
Second Quarter 0.3125 0.03125
Third Quarter 0.3125 0.01
Fourth Quarter 0.4375 0.03125
Year ended December 31, 1999
First Quarter $ 0.30 $ 0.03125
Second Quarter 0.625 0.03125
Third Quarter (through July 12, 1999) 0.25 0.25
</TABLE>
Our common stock is traded in the over-the-counter market under the
symbol "HFDC." The common stock is not listed on any stock exchange, and price
information is not regularly quoted on any automated quotation system. The
prices listed 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. These prices
may not necessarily represent actual transactions. As of July 12, 1999, the last
day on which transactions in HomeFed common stock were reported was July 6,
1999. On July 6, 1999, the closing price for HomeFed common stock was $0.25 per
share. As of July 12, 1999, there were approximately 10,400 stockholders of
record.
We have not declared dividends on the common stock during 1996, 1997 or
1998 and do not intend to pay dividends for the foreseeable future.
Our common stock does not currently meet the minimum requirements for
listing on a national securities exchange or inclusion in the Nasdaq Stock
Market.
The transfer agent for our common stock is American Stock Transfer &
Trust Company, 40 Wall Street, New York, New York 10005.
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<PAGE>
CAPITALIZATION
The following table shows our capitalization at March 31, 1999. Actual
capitalization is shown together with capitalization as adjusted to show the
effect the sale of 46,557,826 additional shares of HomeFed common stock to the
trust on July 8, 1999 would have had if it had occurred on March 31, 1999. You
should read this table with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our financial statements included in
this prospectus.
<TABLE>
<CAPTION>
March 31, 1999
--------------
Actual As Adjusted
------ -----------
(In thousands, except
per share amounts)
<S> <C> <C>
Debt:
Note payable...................................................... $ 20,320 $ 20,320
Advance under common stock subscription................................ 6,710 --
Stockholders' deficit:
Common stock, $.01 par value; 100,000,000 shares authorized,
10,000,000 actual issued and outstanding,
56,557,826 issued and outstanding as adjusted..................... 100 566
Additional paid-in-capital........................................ 346,919 354,833
Accumulated deficit............................................... (356,428) (356,428)
----------- -----------
Total stockholders' deficit.................................. (9,409) (1,029)
----------- -----------
Total capitalization..................................... $ 17,621 $ 19,291
=========== ===========
Book value per share................................................... $ (0.94) $ (0.02)
=========== ===========
</TABLE>
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<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data have been summarized from our
consolidated financial statements and are qualified in their entirety by
reference to, and should be read in conjunction with, these consolidated
financial statements and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
<TABLE>
<CAPTION>
Three Months Ended
--------------------------
March 31, Year Ended December 31,
-------------------------- ----------------------------------------------------------------
1999(a) 1998 1998 1997 1996 1995 1994
----------- ------------ ---------- ---------- ----------- ----------- -------------
(Unaudited) (In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED INCOME
STATEMENT DATA:
Sales of residential and
commercial properties $ 2,250 $ 891 $ 5,752 $ 4,011 $ 8,988 $ 9,422 $ 4,484
Gross profit (loss) 32 (3) 38 (37) (464) 426 66
Interest expense 584 772 2,828 2,997 3,063 1,458 -
Loss from operations (1,456) (923) (4,545) (3,864) (6,424) (2,435) (3,020)
Reorganization items-
expenses - - - - - (1,924) (1,424)
Loss before
extraordinary item (1,412) (862) (4,273) (3,577) (6,297) (4,161) (4,294)
Extraordinary item:
Extinguishment of debt
- bankruptcy - - - - - 108,881 -
Net earnings (loss) (1,412) (862) (4,273) (3,577) (6,297) 104,720 (4,294)
Per share:
Basic earnings (loss)
per common share:
Loss before
extraordinary item $ (0.14) $ (0.09) $ (0.43) $ (0.36) $ (0.63) $ (0.42) $ (0.43)
Extraordinary item - - - - - 10.89 -
-------- -------- -------- -------- --------- --------- ----------
Net earnings (loss) $ (0.14) (0.09) (0.43) (0.36) (0.63) 10.47 (0.43)
======== ======== ======== ======== ========= ========= ==========
Diluted earnings (loss)
per common share:
Loss before
extraordinary item $ (0.14) $ (0.09) $ (0.43) $ (0.36) $ (0.63) $ (0.09) $ (0.43)
Extraordinary item - - - - - 3.35 -
-------- -------- -------- -------- --------- --------- ----------
Net earnings (loss) $ (0.14) $ (0.09) $ (0.43) $ (0.36) $ (0.63) $ 3.26 $ (0.43)
======== ======== ======== ======== ========= ========= ==========
</TABLE>
(continued)
- ------------------------
(a) We have an investment in Otay Land Company. During the first
quarter of 1999, the limited liability company agreement governing this
investment was amended. As a result, we now have the ability to control Otay
Land Company. Accordingly, Otay Land Company has been included in our
consolidated financial statements as of March 31, 1999. We previously had
accounted for this investment under the equity method of accounting. As a
result, land and real estate held for development and sale increased by
$20,560,000, minority interest increased by $10,000,000 and investment in Otay
Land Company was reduced to zero.
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<PAGE>
<TABLE>
<CAPTION>
At March 31, At December 31,
-------------- ----------------------------------------------------------------
1999(a) 1998 1997 1996 1995 1994
-------------- ----------- ---------- ----------- ---------- ------------
(Unaudited) (In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
SELECTED BALANCE
SHEET DATA:
Land and real estate held
for development and sale $ 23,090 $ 4,636 $ 9,652 $ 13,528 $ 22,069 $ 21,139
Total assets 28,672 19,251 15,457 17,091 26,851 23,387
Notes payable to Leucadia
Financial Corporation 20,320 19,736 26,085 23,877 26,996 1,199
Other notes payable - - - - 126 173
Stockholders' deficit (9,409) (7,997) (10,739) (7,162) (865) (106,845)
Shares outstanding 10,000 10,000 10,000 10,000 10,000 10,000
Book value per share $ (0.94) $ (0.80) $ (1.07) $ (0.72) $ (0.09) $ (10.68)
</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.
- ---------------------
(a) We have an investment in Otay Land Company. During the first
quarter of 1999, the limited liability company agreement governing this
investment was amended. As a result, we now have the ability to control Otay
Land Company. Accordingly, Otay Land Company has been included in our
consolidated financial statements as of March 31, 1999. We previously had
accounted for this investment under the equity method of accounting. As a
result, land and real estate held for development and sale increased by
$20,560,000, minority interest increased by $10,000,000 and investment in Otay
Land Company was reduced to zero.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The purpose of this section is to discuss and analyze HomeFed's
consolidated financial condition, liquidity and capital resources and results of
operations. You should read this discussion in conjunction with the consolidated
financial statements and related notes that are included in this prospectus.
LIQUIDITY AND CAPITAL RESOURCES
For the three-month period ended March 31, 1999, net cash was provided
by operating activities, principally from sales of residential properties. For
the three-month period ended March 31, 1998, net cash was used in operating
activities, principally to fund interest and general and administrative
expenses.
For the years ended December 31, 1998, 1997 and 1996, net cash was
provided by operating activities, principally from sales of real estate. Our
principal sources of funds are dividends or borrowings from subsidiaries, fee
income that we may earn from the San Elijo Hills project and amounts received
pursuant to the stock purchase agreements with Leucadia described below. We are
dependent upon the cash flow, if any, from the sale of real estate and
management fees in order to pay expenses, including our debt service payments.
We expect that cash on hand, together with cash generated from lot
sales and the purchase price received under the stock purchase agreements with
Leucadia, which we describe below, will be sufficient to meet our cash flow
needs for the foreseeable future. However, our ability to provide services under
the San Elijo Hills development agreement after 1999 will depend significantly
upon our receipt of fees under that development agreement. If at any time in the
future our cash flow is insufficient to meet our cash requirements, we could
sell real estate projects held for development or seek to borrow funds. However,
because all of our assets are pledged to Leucadia Financial to collateralize our
$26,500,000 borrowing from Leucadia Financial, we may be unable to obtain
financing at favorable rates from sources other than Leucadia Financial.
In 1998, we agreed to sell additional HomeFed common stock to Leucadia
in connection with the development agreement and the restructuring of our
convertible note and related loan agreement with Leucadia Financial.
In August 1998, we entered into the development agreement with a
subsidiary of Leucadia that is the owner and master developer of San Elijo
Hills. Under this development agreement, we are the development manager of the
San Elijo Hills project, a master planned community to be sold in phases to home
builders for development of approximately 3,400 homes expected to be completed
over the next ten years. As development manager, we are responsible for the
overall management of the project, including arranging financing, coordinating
marketing and sales activity, and acting as construction manager. The
development agreement provides that we will receive certain fees in connection
with the project. These fees consist of marketing, field overhead and management
service fees. They are based on a fixed percentage of gross revenues of the
project and are expected to cover our cost of providing services under the
development agreement. The development agreement also provides for a success fee
to HomeFed out of the project's net cash flow, if any, as described below, up to
a maximum amount. Whether the success fee, if it is earned, will be paid to
HomeFed prior to the conclusion of the project will be at the discretion of the
project owner.
To determine "net cash flow" for purposes of calculating the success
fee, all cash expenditures of the project will be deducted from total revenues
of the project. Examples of "expenditures" for these purposes include land
development costs, current period operating costs and indebtedness, either
collateralized by the project, which were approximately $34,900,000 at March 31,
1999, or owed by the project's owner to Leucadia, which were approximately
$37,300,000 at March 31, 1999. As a success fee, we are entitled to receive
payments out of net cash flow, if any, up to the aggregate amount of
18
<PAGE>
indebtedness that is either collateralized by the project or paid to Leucadia or
its affiliates, which was $72,200,000 at March 31, 1999. The balance of net cash
flow, if any, will be paid to us and the project owner in equal amounts.
However, the amount of the success fee cannot be more than 68% of net cash flow
minus the amount of indebtedness. There can be no assurance, however, that we
will receive any success fee at all for this project. We believe that any
success fee that we may receive will be our principal source of net income
earned through our participation in the San Elijo Hills project.
As of August 14, 1998, HomeFed and Leucadia Financial entered into a
new loan agreement that restructured the convertible note originally issued by
us in 1995 to fund our bankruptcy plan and the related loan agreement. The
restructured note:
o has a principal amount of approximately $26,500,000, which
includes additions to principal from accrued and unpaid
interest on the original note to the date of the
restructuring, as permitted under its terms;
o extends the maturity date from July 3, 2003 to December 31,
2004;
o reduces the interest rate from 12% to 6%; and
o eliminates the convertibility feature of the original note.
We pay interest only on the restructured note on a quarterly basis. The
principal of the restructured note is not due to be repaid until December 31,
2004. During the year ended December 31, 1998, we paid Leucadia Financial
approximately $2,162,000 in interest on the original note and the restructured
note.
In August and October 1998, HomeFed entered into two stock purchase
agreements with Leucadia, pursuant to which we agreed to sell an aggregate of
46,557,826 additional shares of HomeFed common stock to Leucadia. The total
purchase price for these shares was $8,380,400. During 1998 Leucadia advanced to
us $6,710,300 of the total purchase price. This amount would have been
refundable if closings under the stock purchase agreements had not occurred. In
1998, Leucadia assigned the stock purchase agreements to the trust. On July 8,
1999, the trust purchased 46,557,826 shares of HomeFed common stock under the
stock purchase agreements and paid us the $1,670,100 balance of the purchase
price for these shares. The trust currently owns 50,675,812 shares of HomeFed
common stock, representing 89.6% of the outstanding HomeFed common stock. Under
the terms of the trust agreement, the trust is required to distribute all of the
HomeFed common stock that it owns as promptly as possible following this
purchase and the effectiveness of the registration statement of which this
prospectus forms a part. The 5,882,014 shares of HomeFed common stock currently
held by stockholders other than the trust represents approximately 10.4% of the
outstanding HomeFed common stock. After the distribution of stock by the trust,
Joseph S. Steinberg, a director of HomeFed and a director and President of
Leucadia, will beneficially own approximately 12.7%, and Ian M. Cumming,
Chairman of the Board of Directors of Leucadia, will beneficially own
approximately 13.9%, of the outstanding HomeFed common stock.
In 1998 and 1997, we entered into agreements pursuant to which we sold
81 residential lots at the Paradise Valley project (described under "Our Company
- -- Our Current Development Projects") for $3,611,000 ($2,719,000 in 1998), less
closing costs. In the first quarter of 1999, we sold the remaining 75
residential lots at the Paradise Valley project for $2,250,000, less closing
costs. We have continuing obligations with respect to this project, including
the obligation to construct a recreation center. We estimate that construction
of the recreation center for the Paradise Valley community will be completed at
a cost of approximately $1,100,000. We have provided a $1,000,000 letter of
credit for this obligation, which is collateralized by a $1,000,000 deposit. We
anticipate that construction of the recreation center will begin in 1999.
In February 1999, one of HomeFed's consolidated partnerships placed
approximately $197,000 on deposit with a financial institution in Salt Lake
City, Utah to secure a standby letter of credit. The letter of credit was issued
19
<PAGE>
to guaranty the partnership's obligation to complete landscape, irrigation and
fencing improvements at the Paradise Valley project.
In connection with an indemnity agreement to a third party surety, a
HomeFed subsidiary is required to (1) maintain a minimum net worth of $5,000,000
and a minimum cash balance of $400,000 or (2) provide an irrevocable letter of
credit. The HomeFed subsidiary entered into this indemnity agreement in 1990 in
connection with the construction of infrastructure improvements in a development
located in La Quinta, California. Based upon current estimates, the amount of
the letter of credit required to satisfy this obligation would be approximately
$460,000. We have not elected to deliver this letter of credit, although we may
choose to do so in the future if we determine that the minimum net worth
requirement restricts operating flexibility.
In October 1998, HomeFed and Leucadia formed Otay Land Company. We are
the manager of Otay Land Company. Through March 31, 1999, we invested
$10,575,000 as capital and Leucadia invested $10,000,000 as a preferred capital
interest. In 1998, Otay Land Company purchased approximately 4,800 acres of land
located south of San Diego, California, for approximately $19,500,000. We are
currently investigating how to develop this project to maximize profitability.
We believe our existing cash resources are sufficient to cover our anticipated
costs of our current maintenance, management and marketing activities at this
project. Distributions of net income, if any, from this investment first will be
paid to Leucadia until it has received an annual cumulative preferred return of
12% on, and repayment of, its preferred investment. Any remaining funds will be
distributed to HomeFed.
In February 1998, we purchased 19 lots at the Silverwood project
(described under "Our Company -- Our Current Development Projects") from
Leucadia Financial for a purchase price of $500,000. On July 31, 1998, we sold
all of the 97 lots we owned in the Silverwood project to Southfork Partnership
for $3,033,000, less closing costs.
As of December 31, 1998, we have net operating loss carryovers ("NOLs")
of $266,245,000 available to reduce our future federal income tax liabilities
and NOLs of $32,305,000 available to reduce our future state income tax
liabilities. Most of these NOLs are not available to reduce federal alternative
minimum taxable income, which is currently taxed at the rate of 20%. As a
result, we expect to pay federal income tax at a rate of 20% during future
periods, even if our NOLs are available to reduce regular taxable income.
RESULTS OF OPERATIONS
Comparison of three-month periods ended March 31, 1999 and 1998
Sales of residential properties increased in the three-month period
ended March 31, 1999 compared to the same period in 1998. This increase resulted
from our 1999 sale of the remaining 75 residential lots in the Paradise Valley
project, compared to the sale of 20 residential lots in that project in 1998.
Cost of sales recorded during these periods reflects the level of sales
activity.
The provision for losses on real estate investments includes $225,000
reflecting an increase in the estimated cost to complete the recreational center
for the Paradise Valley community.
Interest expense for the three-month period ended March 31, 1999
reflects $391,000 due and subsequently paid to Leucadia Financial on the
restructured note and $193,000 resulting from the amortization of a portion of
the difference between the fair value of the restructured note and the carrying
value of the convertible note. Interest expense for the same period in 1998
reflects interest of $772,000 due on the convertible note.
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General and administrative expenses increased in the three-month period
ended March 31, 1999 as compared to the same period in 1998 as a result of our
increased operating activities in connection with the San Elijo Hills project
and the Otay Ranch project, including opening our office in Carlsbad,
California.
Income tax expense for all periods presented relates to state franchise
taxes. We have not recorded federal income tax benefits for our operating losses
because of the uncertainty that we will have sufficient future taxable income
required in order to recognize these tax benefits.
Comparison of annual periods ended December 31, 1998, 1997 and 1996
Sales of residential properties increased in 1998 as compared to 1997.
In 1998, we sold 97 lots in the Silverwood project and 61 lots at the Paradise
Valley project, while in 1997, we sold only 82 lots and two finished homes in
the Paradise Valley project. Sales of residential properties decreased in 1997
as compared to 1996 due to the greater proportion of lot sales in 1997, with
only two residential home sales, compared to the greater proportion of home
sales during 1996, when we sold 62 lots and 25 homes in the Paradise Valley
project and seven homes in another project.
Land and real estate held for development and sale is carried at the
lower of cost or fair value less costs to sell. The provisions for losses for
the years ended December 31, 1998, 1997 and 1996 reflect our estimates to reduce
the carrying value of real estate investments to this value. As a result of
recording write-downs of carrying values during each of the last three years,
gross profit (loss) upon sale has been insignificant. Actual cost of sales
recorded during these periods reflects the level of sales activity, as well as
provisions for losses.
Interest expense for all years presented primarily reflects the
interest due to Leucadia Financial on the restructured note and the convertible
note, including interest of $377,000 for 1998, $2,208,000 for 1997 and
$2,669,000 for 1996, which was not paid and was added to the principal balance
of the convertible note. Interest expense for 1998 and 1997 also reflects
interest of $2,162,000 and $789,000, respectively, due on the restructured note
and convertible note, which was paid by HomeFed. Interest of $385,000 was also
paid to Leucadia Financial on a construction loan in 1996.
The increase in general and administrative expenses in 1998 as compared
to 1997 reflects approximately $618,000 of increased costs for operating
expenses attributable to the San Elijo Hills project and Otay Ranch project,
including opening an office in Carlsbad, California.
The decrease in general and administrative expenses in 1997 compared to
1996 reflects reduced professional fees, insurance costs and selling expenses
attributable to the Paradise Valley project, which was substantially completed
in 1996.
Income tax expense for all years presented relates to state franchise
taxes. HomeFed has not recognized any income tax benefit for its operating
losses in all years presented due to the uncertainty of sufficient future
taxable income required in order to recognize these tax benefits.
YEAR 2000
The year 2000 issue is the result of computerized systems being written
to store and process the year portion of dates using two digits rather than four
digits. As a consequence, date-sensitive systems may fail or produce erroneous
results on or before January 1, 2000 because the year 2000 will be interpreted
incorrectly.
HomeFed's software applications generally are purchased from
mass-market software companies, and, based on literature provided by software
manufacturers, we believe that this software is designed to be year 2000
compliant. Our computer hardware systems are generally new and designed to be
year 2000 compliant. We have engaged a consultant to test our systems to
determine their year 2000 compliance. If systems are found not to be year 2000
compliant, they will be either repaired or replaced. To date, we have incurred
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costs of less than $5,000 in our year 2000 compliance efforts and do not
anticipate making material expenditures in the future.
Based upon our year 2000 risk assessment work performed thus far, we
believe the most likely year 2000 related failures would be related to a
disruption of materials and services or loss of data or plans provided by third
parties. We are assessing all third parties with which we have material
relationships to determine their compliance with year 2000 issues. We have begun
to contact suppliers with respect to their year 2000 compliance and expect this
inquiry to be completed by the fourth quarter of 1999. Although we do not expect
that these disruptions would have a material adverse effect on HomeFed's
financial condition or results of operations, we cannot assure you that our
belief is correct or that our risk assessments are, in fact, accurate. There can
be no assurance that our vendors, suppliers and other parties with whom we do
business will successfully resolve their own year 2000 problems, if any. In the
event of any such failures or other year 2000 failures, there can be no
assurance that there will not be a material adverse effect on HomeFed's
financial condition or results of operations.
INFLATION
HomeFed, as well as the real estate development and homebuilding
industry in general, may be adversely affected by inflation, primarily because
of either reduced rates of savings by consumers during periods of low inflation
or higher land and construction costs during periods of high inflation. Low
inflation could adversely affect consumer demand by limiting growth of savings
for down payments, ultimately affecting demand for real estate and our revenues.
In addition, higher mortgage interest rates may significantly affect the
affordability of permanent mortgage financing to prospective purchasers. High
inflation also increases our costs of labor and materials. We would attempt to
pass through to customers any increases in our costs through increased selling
prices. To date, high or low rates of inflation have not had a material adverse
effect on our results of operations. However, there is no assurance that high or
low rates of inflation will not have a material adverse impact on our future
results of operation.
INTEREST RATES
Our operations are interest-rate sensitive. Overall housing demand is
adversely affected by increases in interest costs. If mortgage interest rates
increase significantly, this may negatively impact the ability of a home buyer
to secure adequate financing. This could adversely affect our revenues, gross
margins and profitability.
PROPERTIES
Through our subsidiary, Otay Land Company, we own 4,800 acres of the
22,900-acre Otay Ranch master planned community, and we own approximately 20
acres at the Paradise Valley project, each as described under the heading "Our
Company -- Our Current Development Projects" and "-- Our Master Planned
Communities." Land held for development and sale has an aggregate book value of
approximately $23,090,000 at March 31, 1999.
Our corporate headquarters are located at 1903 Wright Place, Suite 220,
Carlsbad California 92008 in part of an office building leased from a subsidiary
of Leucadia. Our arrangements relating to this space are described under the
heading "Certain Transactions -- Office Space."
LEGAL PROCEEDINGS
San Elijo Hills received the last of its required discretionary
governmental approvals in March 1998 and therefore, subject to the litigation
described below, became "fully entitled." In January 1997 the San Elijo Ranch
Final Subsequent Environmental Impact Report was certified by the City of San
Marcos. The report, required under the California Environmental Quality Act,
analyzes the potential environmental impact associated with the development of
the San Elijo Hills community. In a case named CARE v. City of San Marcos, et
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al., Case No. N074070, brought in the San Diego Superior Court, the trial court,
by Citizens Against Rural Exploitation, Inc., the adequacy of the report was
challenged. The report was found to be adequate by the trial court and CARE
appealed this decision. In December 1998, the California Court of Appeal upheld
the lower court's ruling in all respects except one. The Court of Appeal found
that the analysis of the cumulative impact of traffic during the early phases of
development of the project was not adequate. The case was sent back to the trial
court to address the traffic issue. The trial court directed the City of San
Marcos to vacate its certification of the report, consider the cumulative impact
of traffic during the early phases of the project and recertify the report
before the approval of any future entitlements. On January 29, 1999, the owner
of San Elijo Hills and CARE entered into a settlement agreement. This settlement
enables project construction to proceed while recertification of the report is
under consideration. The City of San Marcos is in the process of revising the
report to consider the cumulative impact of traffic during the early phases of
the project development and anticipates hearings to consider the report
recertification in June or July of 1999. Thereafter, judicial confirmation of
the City's compliance with the Court of Appeal's decision will be requested. In
May, 1999, two parties filed motions to vacate the part of the trial court's
order that allows development to proceed pending recertification of the report.
The first motion to vacate has been denied. The second motion to vacate was
withdrawn after a settlement with San Elijo Hills. Denial of the first motion
may be appealed. Development at San Elijo Hills is continuing pending
recertification of the report and any future legal proceedings. Although we are
not a party to this litigation, any disruption in the development of the San
Elijo Hills project as a result of this litigation could have a material adverse
effect on our future results of operations.
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THE DISTRIBUTION
REASONS FOR THE DISTRIBUTION
Background
In March 1998, Leucadia proposed that we become development manager of
Leucadia's San Elijo Hills project. However, to take advantage of this
opportunity, we determined that we would need to obtain equity financing and to
restructure our outstanding convertible note payable to Leucadia Financial. If
accomplished, these steps would provide funding and improved cash flow for us to
fulfill our obligations as development manager.
Our board of directors formed a special committee of directors
unaffiliated with Leucadia to consider this proposal from Leucadia. This
committee consisted of Mr. Considine and Dr. Lobatz. The Committee engaged
consultants to evaluate the development proposal, performed substantial due
diligence with respect to the proposal and negotiated with Leucadia the
development management agreement and Leucadia's agreement to make equity
financing available to HomeFed and to restructure the terms of HomeFed's
outstanding $20,000,000 convertible collateralized note payable to Leucadia
Financial. The special committee recommended that the board of directors approve
the development management agreement.
In August 1998, upon approval of the board of directors, with Mr.
Borden, a Leucadia Vice President as well as a HomeFed director, not voting,
HomeFed:
o agreed to sell 37,056,112 shares of HomeFed common stock to
Leucadia for $6,670,100 in cash pursuant to a stock purchase
agreement, dated August 14, 1998;
o entered into an amended and restated loan agreement with
Leucadia's subsidiary, Leucadia Financial, that restructured
HomeFed's outstanding secured convertible note; and
o entered into the development management agreement for San
Elijo Hills with another subsidiary of Leucadia.
In October 1998, the board of directors approved a second stock
purchase agreement, dated October 20, 1998, pursuant to which HomeFed agreed to
sell an additional 9,501,714 shares of HomeFed common stock to Leucadia for
$1,710,300 in cash.
Structuring the Financing to Protect HomeFed's Tax Loss Carryovers
HomeFed has substantial tax loss carryovers available to offset taxable
income. Under Section 382 of the federal tax law, if changes in ownership of
HomeFed exceed a 50% change over any three-year period, use of these tax losses
would be limited. This would be material and adverse to us. Under federal tax
laws, contracts to acquire shares of HomeFed common stock could be treated as
ownership of the shares to be acquired, even before the shares are issued. As a
result, HomeFed and Leucadia concluded that it would be prudent to assume that
the shares to be acquired under stock purchase agreements should be taken into
account in determining changes in ownership of HomeFed stock.
Before entering into the August 1998 agreement to purchase HomeFed
common stock, Leucadia owned 41.2% of the outstanding HomeFed common stock. The
number of shares of HomeFed common stock that could be purchased under the stock
purchase agreements without triggering tax law limitations was based upon the
share ownership of Leucadia and HomeFed in August 1998. Changes in ownership of
HomeFed and Leucadia stock after August 1998 could have resulted in too large a
change in ownership, thereby jeopardizing our ability to use our tax losses. We
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could rely upon the transfer restrictions in our charter to limit the
possibility of changes in ownership of HomeFed stock. However, Leucadia was not
willing to restrict its issuance and/or repurchase of its own shares. Under
federal tax regulations, as long as Leucadia owned HomeFed common stock,
transactions involving Leucadia's shares would be treated as also being
transactions in HomeFed common stock. When combined with purchases of HomeFed
common stock under the stock purchase agreements, transactions in Leucadia
shares could have resulted in too large a change in HomeFed common stock
ownership in too short a period of time. Consequently, to retain flexibility to
effect transactions involving Leucadia shares and to avoid the risk associated
with inadvertent transactions involving Leucadia shares, Leucadia decided to
make a distribution of the HomeFed common stock and the stock purchase
agreements and associated cash to Leucadia shareholders in proportion to their
interests in Leucadia.
Leucadia determined that, for tax purposes, a prompt distribution to
its shareholders of its entire interest in HomeFed was prudent:
o to eliminate the risk described above that transactions in
Leucadia's shares would result in limitations on HomeFed's
ability to use its own tax losses; and
o to minimize the risk that the value of HomeFed common stock to
be distributed and the taxes incurred by the Leucadia
shareholders attributable to this distribution would increase
as a result of a possible increase in the value of HomeFed
after announcement of the August 1998 transactions.
Timing of the Distribution; Dividend of the Interests in the Trust
Under our 1995 bankruptcy plan of reorganization, HomeFed could not
issue HomeFed common stock before July 3, 1999. Because of this, Leucadia
concluded that any distribution to Leucadia shareholders prior to the issuance
of HomeFed common stock under the stock purchase agreements was not feasible.
However, to implement the timely equity financing for HomeFed, while unlinking
transactions in Leucadia securities from any impact on HomeFed, Leucadia formed
a trust for the benefit of Leucadia shareholders and on August 14, 1998
transferred to the trust:
o 4,117,986 shares of HomeFed common stock held by Leucadia at
that time, which represented approximately 41.2% of the
HomeFed common stock then outstanding;
o the August 14, 1998 stock purchase agreement to purchase
37,056,112 shares of HomeFed common stock; and
o $1,670,100 for the unpaid portion of the purchase price for
the HomeFed common stock.
On August 25, 1998 Leucadia declared a dividend of beneficial interests
in the trust to Leucadia shareholders of record on August 25, 1998. These trust
interests:
o are not represented by any trust certificates;
o are not transferable except upon the death of the holder of
the trust interest;
o do not represent any equity interest in HomeFed;
o do not carry any right to vote any HomeFed common stock; and
o are not entitled to dividends or interest.
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As a result of the August 25, 1998 dividend of interests in the trust
that owned all of Leucadia's interests in HomeFed, Leucadia was no longer
treated as the owner of any HomeFed common stock for tax purposes. Consequently,
transactions in Leucadia's securities no longer had any impact on determining
whether changes in the ownership of HomeFed common stock occur.
Under the terms of the trust agreement, Leucadia agreed to transfer to
the trust any rights to HomeFed common stock that it acquired prior to November
11, 1998. Effective October 20, 1998, Leucadia and HomeFed entered into the
October stock purchase agreement providing for the purchase of an additional
9,501,714 shares of HomeFed common stock and Leucadia advanced to HomeFed the
$1,710,300 purchase price for these shares. Leucadia then transferred the
October stock purchase agreement to the trust.
On July 8, 1999, the trust purchased 46,557,826 shares of HomeFed
common stock pursuant to the August and October stock purchase agreements. The
sole business of the trust is to hold the 50,675,812 shares of HomeFed common
stock, which represent approximately 89.6% of the 56,557,826 outstanding shares
of HomeFed common stock.
Joseph A. Orlando, Vice President and Chief Financial Officer of
Leucadia, is the trustee of the trust; Ian M. Cumming and Joseph S. Steinberg,
directors of HomeFed and Leucadia, as well as the Chairman and President,
respectively, of Leucadia, have the power to direct voting of any HomeFed common
stock held by the trust.
NO FRACTIONAL SHARES
No fractional shares will be issued in the distribution. If the number
of shares of HomeFed common stock to which you would otherwise be entitled
includes a fraction of a share, you will receive the cash value of the
fractional share, based on the prevailing market price per share of HomeFed
common stock. Leucadia shareholders who own their stock in "street name" through
a broker or other nominee listed as the holder of record will have their
fractional shares handled according to the practices of the broker or nominee,
which may result in those shareholders receiving a price for their fractional
share interests that is higher or lower than the price paid by the trust to
shareholders of record.
EXPENSES
Expenses associated with the distribution, which are expected to be
approximately $ in the aggregate, will be paid by HomeFed.
CONDITIONS
The consummation of the distribution does not require the approval of
HomeFed's stockholders and is not contingent upon the occurrence of any event
except the effectiveness of the registration statement containing this
prospectus.
RELATIONSHIP WITH LEUCADIA AFTER THE DISTRIBUTION
Following the distribution, HomeFed and Leucadia will continue to have
a relationship as a result of agreements entered into and facts existing prior
to the distribution. These include:
o Leucadia Financial, a subsidiary of Leucadia, is the holder of
HomeFed's $26,500,000 principal amount collateralized note.
Accordingly, Leucadia Financial is HomeFed's principal
creditor.
o Leucadia Financial provides administrative services to
HomeFed, including the services of HomeFed's President and its
Secretary/Treasurer.
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o HomeFed acts as development manager for Leucadia's San Elijo
Hills residential real estate project.
o The Leucadia subsidiary that owns the San Elijo Hills project
has agreed to purchase or to designate an affiliate to
purchase approximately $66,100,000 of bonds to be issued by
the City of San Marcos, California Redevelopment Agency. These
bonds will provide a substantial portion of the financing that
will be used to build infrastructure and school facilities
serving the San Elijo Hills project.
o Leucadia is an investor in Otay Land Company, a subsidiary of
HomeFed that owns land in southern California. Otay's net
income, if any, will be distributed only to Leucadia until
Leucadia has been paid back its $10,000,000 preferred capital
investment, together with a 12% return on its investment.
Until Leucadia has been paid in full, we will not receive any
distribution from Otay.
o Four of HomeFed's six directors are executive officers of
Leucadia or its subsidiaries. Two directors, Messrs. Ian M.
Cumming and Joseph S. Steinberg, are directors, principal
shareholders and the Chairman and President, respectively, of
Leucadia.
FEDERAL INCOME TAX CONSEQUENCES
Following is a general discussion of certain United States federal
income tax consequences to the shareholders of Leucadia on August 25, 1998 in
connection with the formation of the trust and the distribution of the HomeFed
stock from the trust. This discussion is for general information and may not
apply in the specific circumstances of a particular shareholder. For purposes of
the following discussion, we have assumed that all interests are held by you as
capital assets.
Once beneficial ownership of the trust was distributed on August 25,
1998, you were treated as directly owning your share of the trust's assets for
federal income tax purposes. Consequently, the August distribution was treated,
for tax purposes, as a dividend to you of your share of the assets held by the
trust on that date. Similarly, the contribution to the trust by Leucadia on
October 20, 1998 of the October stock purchase agreement was treated for tax
purposes as a dividend on that date to you.
The amount of the dividend income equaled the value of the assets that
were treated as having been directly distributed to you, valued as of the date
distributed. Leucadia has advised HomeFed that, based on its calculation of the
aggregate value of these assets, the total dividend income attributable to these
transactions was $0.1426 for each Leucadia share that you owned of record on
August 25, 1998. In reaching this valuation, Leucadia considered the value of
the HomeFed common stock already owned, the stock purchase agreements, and the
underlying shares of HomeFed common stock , in each case as of the appropriate
valuation date.
The purchase of HomeFed common stock by the trust and the distribution
by the trust of its HomeFed common stock will not have any further federal tax
consequences for you, because, for tax purposes, you already are treated as
directly owning the trust's assets.
Tax Basis and Holding Period in Shares Acquired from the Trust
Leucadia has advised us that based upon Leucadia's valuation of the
assets in the trust, your tax basis in each share of HomeFed common stock
received from the trust would equal $0.179 per share. All of the HomeFed common
stock received by you from the trust will not all have the same holding period,
because the trust acquired these shares on two different dates. Your holding
period with respect to 8.13% of the HomeFed common stock received from the
trust, representing shares acquired by the trust on August 25, 1998, will be
considered to have commenced on August 26, 1998, while the holding period with
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respect to the remaining 91.87% of those shares, representing shares acquired by
the trust on July 8, 1999, should commence on July 9, 1999.
You are urged to consult your own tax advisor.
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OUR COMPANY
INTRODUCTION
We invest in and develop residential real estate projects in the State
of California. This business is conducted directly and through subsidiaries.
In 1992, we filed for bankruptcy protection under chapter 11 of the
United States Bankruptcy Code and emerged from bankruptcy in 1995 pursuant to a
plan of reorganization. Leucadia Financial principally funded the plan by
purchasing a $20,000,000 principal amount, 12% collateralized convertible note
due 2003 and 2,700,000 shares of newly issued HomeFed common stock. Leucadia
also received 1,417,986 shares of HomeFed common stock under the plan. These
shares, together with the shares Leucadia Financial purchased, constituted 41.2%
of the outstanding HomeFed common stock at the time we came out of bankruptcy.
OUR CURRENT DEVELOPMENT PROJECTS
HomeFed has been involved in the development of California real estate
since our founding in 1988. After emerging from bankruptcy, we were engaged
primarily in selling developed and undeveloped lots in bulk to homebuilders in
two development projects: Paradise Valley (which we describe below) and
Silverwood, a 135-acre development project located in the Granite Bay area of
greater Sacramento, California. While each of these projects was part of a
master planned community, we were not the master plan developer for either of
these projects. Substantially all of our development interests in Silverwood
were sold in July 1998 for approximately $3,033,000, less closing costs.
Paradise Valley
Paradise Valley is a community located in Solano County in the
northeast portion of the City of Fairfield, California. We originally owned
approximately one-third of this project, and the balance of the project was
owned by three unrelated development companies. Our holdings originally included
84 acres planned for four detached single-family residential sites, three
clustered housing (apartment building) development sites and a school site. We
built and sold 36 residential homes on two of the detached single-family
residential sites from 1995 to 1997. We then changed our marketing strategy, by
stopping our home building program in order to focus instead on sales of
improved and unimproved lots in bulk.
From 1996 to 1998, we sold 205 improved lots on the detached single
family residential sites at the Paradise Valley project for total cash
consideration of approximately $8,927,000. Sales of 61 of these lots closed in
1998 for aggregate consideration of $2,719,000, less closing costs. On February
23, 1999, we sold the remaining 75 lots at the Paradise Valley project, all of
which were unimproved, for consideration of approximately $2,250,000, less
closing costs. We have continuing obligations at Paradise Valley with respect to
warranty liabilities and the completion of a recreational facility that will
become the property of the Paradise Valley Homeowners' Association.
We continue to own the clustered housing development and school sites
at the Paradise Valley project. We are currently in discussions with
governmental authorities concerning the possibility of changing the project's
entitlements to permit development for uses other than clustered housing. Once
these discussions have been concluded, we will determine how best to market
these sites for sale, either as clustered housing, or as permitted under any
amended entitlements that we may receive. The school site, which is subject to a
purchase option held by the local school district, and the clustered housing
development sites have a combined book value at March 31, 1999 of approximately
$2,656,000.
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Our Master Planned Communities
In 1998, we entered into the largest development projects in which we
have been involved since emerging from bankruptcy. These are our first projects
involving development of master planned communities: San Elijo Hills, for which
we are the development manager, and a portion of the larger Otay Ranch planning
area, where we own certain parcels and for which we are one of several
development managers.
For any master planned community, plans must be prepared that provide
for infrastructure, neighborhoods, commercial and industrial areas, educational
and other institutional or public facilities, as well as open space. Once
preliminary plans have been prepared, numerous governmental approvals, licenses,
permits and agreements, referred to as "entitlements," must be obtained before
development and construction may commence. In California, obtaining the
necessary entitlements for large residential developments and master planned
communities is an extended process, which can involve a number of different
governmental jurisdictions and agencies, considerable risk and expense, and
substantial delays. Unless and until the requisite entitlements are received and
substantial work has been commenced in reliance upon the entitlements, a
developer generally does not have any "vested rights" to develop a project. In
addition, as a precondition to receipt of building-related permits, master
planned communities such as San Elijo Hills typically are required in California
to pay impact and capacity fees, or to otherwise satisfy mitigation
requirements, based on governmental assessment of the effects of their projects
on the environment, including, among others, impact on infrastructure,
transportation, waste disposal, education and air quality of the communities.
The land development process for a master planned community entails a
range of activities, including design engineering, grading raw land,
constructing public infrastructure, including streets, utilities and public
facilities, and finishing individual lots. The developer arranges for the design
and the construction and installation by contractors and subcontractors of the
infrastructure in its master planned communities. The development process
results in graded construction sites for homes or other facilities. In our
master planned communities, we will coordinate home construction with commercial
development and installation of parks and recreational facilities. In this
process, we may contract with third parties to develop commercial zones, public
areas and recreational amenities, which may include shopping centers, schools,
libraries, community centers, parks, golf courses and other essential
facilities. It is our policy to retain control over the location and character
of non-residential properties, such as shopping centers and recreational
facilities, within our master planned communities. We will develop our
communities in phases to allow flexibility in selling finished lots to suit
market conditions and to enable us to create stable and attractive
neighborhoods. Consequently, at any particular time, the various phases of a
project will be in different stages of land development and construction.
San Elijo Hills. In August 1998, we entered into a development
management agreement with San Elijo Hills Development Company, a subsidiary of
Leucadia that owns real property located in the City of San Marcos, in San Diego
County, California. Under this development agreement, this project, known as San
Elijo Hills, will be a master planned community of approximately 3,400 homes and
apartments as well as commercial properties. We anticipate that the project will
be sold to builders in phases. The project is expected to be completed over the
course of the next ten years. Subject to recertification and judicial
confirmation of the San Elijo Ranch environmental impact report, San Elijo Hills
is fully entitled and the project is currently under development. We anticipate,
however, applying for additional entitlements to implement certain land use
changes. Failure to obtain these additional entitlements will not have a
material adverse effect on our business. As development manager of San Elijo
Hills, we are responsible for the overall management of the project. Our
responsibilities include:
o preserving existing entitlements;
o obtaining any additional entitlements required for the
project;
o arranging financing for the project;
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o coordinating sales and marketing activity; and
o acting as the construction manager.
The development agreement provides that we may be paid a portion of the
net profits of the project, as determined under the development agreement, as
well as fees for the project management, field overhead and marketing services
we are to provide, based on the revenues of the project. For a description of
the development agreement and determination of any success fee under that
agreement, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
San Elijo Hills has entered into agreements with five merchant builders
to sell the first six neighborhoods of the project, consisting of approximately
735 residential lots, for total consideration of not less than $104,000,000,
subject to increase if some of the builders sell homes above targeted prices.
The prospective buyers have deposited a total of $5,500,000 which is
non-refundable assuming that San Elijo Hills delivers the lots as agreed and
other terms under the agreements are satisfied. Of this amount, approximately
$5,000,000 has been released to San Elijo Hills. These agreements are subject to
certain normal closing conditions, as well as recordation of final subdivision
maps, completion of grading, favorable resolution of existing litigation of the
project's environmental impact statement and, in some cases, formation of a
community facilities district to finance neighborhood improvements. While we
expect that the sale of some of these neighborhoods will close during 1999, we
cannot assure you that any of these sales will actually occur.
Otay Ranch. Our subsidiary, Otay Land Company, owns seven non-adjoining
parcels comprising 4,800 acres located within the larger 22,900-acre Otay Ranch
master planned community. The City of Chula Vista and the County of San Diego
have approved a general development plan for the larger planning area. Although
there is no minimum time within which implementation of the general development
plan must be completed, it is expected that full development of the larger
planning area will take decades. This general development plan establishes land
use goals, objectives and policies within the larger planning area. Any
development within the larger Otay Ranch master planning community must be
consistent with this general development plan. The general development plan for
the larger planning area contemplates home sites, a golf-oriented resort and
residential community, commercial retail centers, a proposed university site and
a network of infrastructure, including roads and highways, a rail transportation
system, park systems and schools. Actual development of any of these will
require that further entitlements and approvals be obtained. Because the larger
planning area will be developed by several independent developers in addition to
ourselves, an inability to coordinate with other developers could adversely
impact our development.
Of the 4,800 acres owned by Otay Land Company, 1,200 acres are
developable and 3,600 acres are zoned as various qualities of non-developable
"open space mitigation land." We have not yet determined how we will develop the
developable land and, accordingly, we do not yet know the nature or extent of
the entitlements or approvals necessary for our development. Under the general
development plan, approximately 1.2 acres of open space mitigation land must be
set aside for each 1.0 acre of developable land. Some owners of developable land
have adequate or excess mitigation land, while other owners lack sufficient
acreage of mitigation land. We expect to have substantially more mitigation land
than we need to develop our property at this project. A market for our open
space mitigation land exists among buyers in the San Diego County Region. We
believe that a market for this land is likely to develop within the larger Otay
Ranch development area as well.
We continue to evaluate how best to maximize the value of this
investment. We believe our current cash resources will be sufficient for
property maintenance, management and marketing pending our determination of how
to proceed with this project. Until we determine our objectives, and, if
necessary, secure additional entitlements and coordinate our development
activities with other developers, we cannot predict when, or if, any revenues
will be derived from this project.
31
<PAGE>
COMPETITION
Real estate development is a highly competitive business. There are
numerous residential real estate developers and development projects operating
in the same geographic area in which we operate. Competition among real estate
developers and development projects is determined by a variety of factors,
including:
o the location of the real estate;
o the market appeal of the development master plan; and
o the developer's ability to build, market and deliver project
segments on a timely basis.
As a master developer, our customers are generally homebuilders, who compete
based on, location, price, market segmentation, product design, and reputation.
GOVERNMENT REGULATION
The residential real estate development industry is subject to
environmental, building, zoning and real estate regulations that are imposed by
various federal, state and local authorities. In developing a community, we must
obtain the approval of numerous governmental agencies regarding matters
including:
o permitted land uses;
o housing density;
o the installation of utility services such as water, sewer,
gas, electric, telephone and cable television; and
o the dedication of acreage for open space, parks, schools and
other community purposes.
Regulations affect homebuilding by specifying, among other things,
o the type and quality of building material that must be used;
o certain aspects of land use and building design; and
o the manner in which homebuilders may conduct their sales,
operations, and overall relationships with potential home
buyers.
Furthermore, changes in prevailing local circumstances or applicable laws may
require additional approvals or modifications of approvals previously obtained.
Timing of the initiation and completion of development projects depends
upon receipt of necessary authorizations and approvals. Delays could adversely
affect our ability to complete projects, significantly increase the costs of
doing so or cause potential customers to purchase competitors' products.
ENVIRONMENTAL COMPLIANCE
Environmental laws may cause us to incur substantial compliance,
mitigation and other costs, may restrict or prohibit development in certain
areas and may delay completion of our development projects. To date,
environmental laws have not had a material adverse effect on us. Other than the
failure to have the San Elijo Hills environmental impact report recertified or a
judicial determination that a recertified report is not in compliance with court
32
<PAGE>
orders, our management is not currently aware of any environmental compliance
matters that could have a material adverse effect on HomeFed. Delays arising
from compliance with environmental laws and regulations could adversely affect
HomeFed's ability to complete our projects, significantly increase the costs of
doing so or cause potential customers to purchase competitors' products.
33
<PAGE>
MANAGEMENT
The following table sets forth information with respect to the
directors and executive officers and directors of HomeFed:
<TABLE>
<CAPTION>
Name Age Position with HomeFed Office Held Since
- ---- --- --------------------- -----------------
<S> <C> <C> <C>
Paul J. Borden 50 President and Director 1998
Corinne A. Maki 42 Secretary and Treasurer 1995
Curt R. Noland 43 Vice President 1998
Patrick D. Bienvenue 44 Director 1998
Timothy M. Considine 58 Chairman of the Board 1992
and Director
Ian M. Cumming 59 Director 1999
Michael A. Lobatz 50 Director 1995
Joseph S. Steinberg 55 Director 1998
</TABLE>
The officers serve at the pleasure of the board of directors of
HomeFed.
The recent business experience of our executive officers and directors
is summarized as follows:
Paul J. Borden. Mr. Borden has served as a director and President of
HomeFed since May 1998. Mr. Borden has been a Vice President of Leucadia since
August 1988, responsible for overseeing many of Leucadia's real estate
investments. Mr. Borden has also served as a Vice President of Leucadia
Financial Corporation, a subsidiary of Leucadia.
Corinne A. Maki. Ms. Maki, a certified public accountant, has served as
Treasurer of HomeFed since February 1995 and Secretary since February 1998.
Prior to that, Ms. Maki served as an Assistant Secretary of HomeFed since August
1995. Ms. Maki has also been a Vice President of Leucadia Financial, holding the
offices of Controller, Assistant Secretary and Treasurer since October 1992. Ms.
Maki has been employed by Leucadia since December 1991.
Curt R. Noland. Mr. Noland has served as Vice President of HomeFed
since October 1998. He spent the last 19 years in the land development industry
in San Diego County as a design consultant, merchant builder and a master
developer. From November 1997 until immediately prior to joining HomeFed, Mr.
Noland was Director of Development at San Elijo Hills. Prior to his employment
by San Elijo Hills, Mr. Noland was employed for eight years by Aviara, a
1,000-acre master planned resort community in Carlsbad, California. He is also a
licensed civil engineer and real estate broker.
Patrick D. Bienvenue. Mr. Bienvenue has served as a director of HomeFed
since 1998 and has been President of Leucadia Financial since June 1998. Since
January 1996, Mr. Bienvenue has been President of Rosemary Beach Land Company, a
subsidiary of Leucadia and, from 1992 until December 1995 he was President and
Chief Executive Officer of Tourwest Inc., a property development and investment
company.
34
<PAGE>
Timothy M. Considine. Mr. Considine has served as Chairman of the Board
and a director of HomeFed since 1992 and has been Managing Partner of Considine
and Considine, an accounting firm in San Diego, California, since 1969.
Ian M. Cumming. Mr. Cumming has served as a director of HomeFed since
May 1999 and has been a director and Chairman of Leucadia, a diversified
financial services holding company, since June 1978. He is also director of
Allcity Insurance Company, a property and casualty insurance company that is
approximately 90% owned by Leucadia, MK Gold, a precious metals mining company
that is approximately 46% owned by Leucadia and Skywest, Inc., a Utah-based
regional air carrier.
Michael A. Lobatz. Dr. Lobatz has served as a director of HomeFed since
February 1995 and has been a practicing physician in San Diego, California since
1981.
Joseph S. Steinberg. Mr. Steinberg has served as a director of HomeFed
since August 1998. Mr. Steinberg has been President of Leucadia since December
1978 and a director of Leucadia since January 1979. He is also director of
Allcity Insurance Company, MK Gold and Jordan Industries, Inc., a company which
owns and manages manufacturing companies, that is approximately 10% owned by
Leucadia.
35
<PAGE>
CERTAIN TRANSACTIONS
From the time of HomeFed's emergence from chapter 11 bankruptcy
protection in July 1995 through August 25, 1998, Leucadia owned approximately
41.2% of HomeFed's outstanding common stock. Since August 25, 1998, the trust
has owned this 41.2% interest. On July 8, 1999 the trust increased its interest
in HomeFed common stock to 89.6% as described below. Under the terms of the
trust agreement, Mr. Joseph S. Steinberg, a director of HomeFed, as well as a
director and President of Leucadia and Mr. Ian M. Cumming, a director of
HomeFed, as well as Chairman of the Board of Leucadia, jointly have the right to
vote any shares of HomeFed common stock held by the trust.
Set forth below is information concerning agreements or relationships
between HomeFed and Leucadia and its subsidiaries.
DEVELOPMENT AGREEMENT
In March 1998, HomeFed's board of directors formed a special committee
of directors unaffiliated with Leucadia to consider a proposal from Leucadia
that HomeFed enter into an agreement to become development manager of San Elijo
Hills. The proposal included Leucadia's agreement to make equity financing
available to HomeFed and to restructure the terms of HomeFed's outstanding
$20,000,000 convertible collateralized note issued to Leucadia Financial. This
committee, consisting of Mr. Considine and Dr. Lobatz, engaged consultants to
evaluate the development proposal, performed substantial due diligence with
respect to the proposal, negotiated the structure of the development proposal
with Leucadia and recommended that the board of directors approve the
development management agreement.
In August 1998, upon approval of the board of directors, with Mr.
Borden, a Leucadia Vice President as well as a HomeFed director, not voting,
HomeFed entered into a development management agreement with a subsidiary of
Leucadia. Under this development agreement, HomeFed is the development manager
of the San Elijo Hills project. As development manager, HomeFed is responsible
for the overall management of the project, including arranging financing,
coordinating marketing and sales activity, and acting as construction manager.
The development agreement provides that HomeFed will receive certain fees in
connection with the project. These fees consist of marketing, field overhead and
management service fees, which are based on a fixed percentage of gross revenues
received by the project. The marketing and management service fees are expected
to cover HomeFed's cost of providing these services. In addition, the
development agreement provides for payment of a success fee to HomeFed in some
instances, based on the net cash flow from the project, as determined in the
development agreement, subject to a maximum success fee. Whether a success fee,
if it is earned, will be paid to HomeFed prior to the conclusion of the project
will be at the discretion of the project owner. To date, no money is payable to
HomeFed under the development agreement. We discuss the development agreement
further in "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" and "The Distribution
- -- Reasons for the Distribution."
AMENDED LOAN AGREEMENT
HomeFed's chapter 11 plan of reorganization was funded principally by
the issuance of a $20,000,000 convertible note to Leucadia Financial. As of
August 14, 1998, in connection with the development agreement, HomeFed and
Leucadia Financial entered into an Amended and Restated Loan Agreement, pursuant
to which the original convertible note and the related loan agreement were
restructured. The restructured note, dated August 14, 1998, is in the principal
amount of approximately $26,500,000 including the principal amount of the
original note and additions to principal resulting from accrued and unpaid
interest, as allowed under the terms of the original note. The restructured note
extends the maturity date from July 3, 2003 to December 31, 2004, reduces the
interest rate from 12% to 6% and eliminates the convertibility feature of the
original note. Interest only on the restructured note is paid quarterly and all
unpaid principal is due on the date of maturity. During the year ended December
31, 1998, HomeFed paid approximately $2,162,000 in interest on the original note
36
<PAGE>
and the restructured note. Interest of $391,000 was paid on the restructured
note for the quarter ended March 31, 1999. We discuss the amended loan agreement
further in "Management's Discussion and Analysis of Financial Condition and
Results of Operations --Liquidity and Capital Resources."
STOCK PURCHASE AGREEMENTS
In August and October 1998, HomeFed entered into two stock purchase
agreements with Leucadia. Under these agreements HomeFed agreed to sell a total
of 46,557,826 additional shares of common stock to Leucadia for a total purchase
price of $8,380,400 of which Leucadia advanced $6,710,300. In 1998, Leucadia
assigned the stock purchase agreements to the trust. On July 8, 1999, the trust
purchased the 46,557,826 additional shares of HomeFed common stock pursuant to
the stock purchase agreements and, as a result, the trust now owns 89.6% of the
outstanding HomeFed common stock. Under the terms of the trust agreement, the
trust is required to distribute all of the HomeFed stock that it owns as
promptly as possible following the stock purchases under the stock purchase
agreements and the effectiveness of the registration statement of which this
prospectus forms a part. The 5,882,014 shares of HomeFed common stock currently
held by stockholders other than the trust represent approximately 10.4% of the
outstanding HomeFed common stock. After the distribution of stock by the trust,
Mr. Joseph S. Steinberg will own 12.7%, and Mr. Ian M. Cumming will own
approximately 13.9%, of the outstanding HomeFed common stock. We discuss the
stock purchase agreements further in "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and "The Distribution -- Reasons for the Distribution -- Background.
OTAY LAND COMPANY, LLC
In October 1998, HomeFed and Leucadia formed Otay Land Company. Through
March 31, 1999, HomeFed invested $10,575,000 as capital and Leucadia invested
$10,000,000 as a preferred capital interest. HomeFed is the manager of Otay Land
Company. In 1998, Otay Land Company purchased approximately 4,800 acres of land
that is part of a 22,900-acre project located south of San Diego, California,
known as Otay Ranch, for approximately $19,500,000. Net income, if any, from
this investment first will be paid to Leucadia until it has received an annual
cumulative preferred return of 12% on, and repayment of, its preferred
investment. Any remaining funds are to be paid to HomeFed. We discuss Otay
further in "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources," "The Distribution --
Relationship with Leucadia after the Distribution" and "Our Company -- Our
Master Planned Communities -- Otay Ranch."
ADMINISTRATIVE SERVICES AGREEMENT
Since emerging from bankruptcy in 1995, administrative services and
managerial support have been provided to HomeFed by Leucadia Financial. Under
the current administrative services agreement, which extends through February
28, 2002, Leucadia Financial provides the services of Mr. Paul J. Borden,
HomeFed's President, and Ms. Corinne A. Maki, HomeFed's Treasurer and Secretary.
Mr. Borden and Ms. Maki each are officers of Leucadia Financial and Leucadia. We
pay Leucadia an annual fee under this agreement of $296,101, payable monthly,
through February 29, 2000, and future fees will be negotiated after that date.
We have paid to Leucadia Financial a total of $123,000 in administrative fees
for the quarter ended March 31, 1999.
SILVERWOOD
On February 27, 1998, HomeFed purchased 19 lots at the Silverwood
project from Leucadia Financial for a purchase price of $500,000. On July 31,
1998, HomeFed sold its entire 97 lot interest in the Silverwood project for
$3,033,000, less closing costs. We discuss Silverwood further in "Management's
Discussion and Analysis of Financial Condition and Results of Operations
- --Liquidity and Capital Resources" and "Our Business -- Our Current Development
Projects."
37
<PAGE>
OFFICE SPACE
HomeFed rents office space and furnishings from a subsidiary of
Leucadia for a monthly amount equal to its share of the Leucadia subsidiary's
cost for the space and furnishings. The agreement pursuant to which the space
and furnishings are provided extends for a 6-year period, which coincides with
the Leucadia subsidiary's occupancy of the space, and provides for a monthly
rental of $15,400. Since January 1, 1998, HomeFed has accrued $55,981 in rental
to the Leucadia subsidiary, of which $18,900 was paid through March 31, 1999.
38
<PAGE>
DESCRIPTION OF HOMEFED COMMON STOCK
GENERAL
HomeFed's restated certificate of incorporation authorizes the issuance
of 100,000,000 shares of common stock. The following summary describes the
HomeFed common stock as of the date of this prospectus.
VOTING; DISTRIBUTION AND LIQUIDATION RIGHTS
Each valid holder of a share of HomeFed common stock is entitled to one
vote for each share held of record in accordance with applicable provisions of
Delaware law and HomeFed's Bylaws. The shares of HomeFed common stock are not
entitled to cumulative voting rights or to preemptive rights and are not subject
to redemption or assessment. Holders of each share of HomeFed common stock are
entitled to their proportionate share of any distributions to stockholders and
to receive their proportionate share of any dividends that may be declared by
the HomeFed board of directors out of funds legally available for this purpose.
Upon liquidation, dissolution or winding up of HomeFed, holders of HomeFed
common stock will be entitled to receive their proportionate share of assets of
HomeFed which are then legally available for distribution to stockholders. The
issued and outstanding shares of HomeFed common stock are validly issued, fully
paid and nonassessable.
TRANSFER RESTRICTIONS
Shares of HomeFed common stock are subject to certain transfer
restrictions stated in HomeFed's restated certificate of incorporation and in
each certificate representing HomeFed stock. These transfer restrictions will
remain in effect for a period of time that we call the "restriction period." The
restriction period runs until the earlier of:
o December 31, 2010;
o the repeal of Section 382 of the Internal Revenue Code; and
o the beginning of a taxable year of HomeFed in which none of
the following may be carried forward by HomeFed or one of its
subsidiaries for tax purposes:
o operating loss carryovers;
o capital loss carryovers;
o general business credit carryovers; and
o alternative minimum tax credit carryovers and foreign
tax credit carryovers or "net unrealized built-in
loss" within the meaning of Section 382 (all of which
we call "tax benefits").
Any attempted transfer of HomeFed common stock or any other securities of
HomeFed that would be treated as "stock" under applicable tax regulations during
the restriction period or pursuant to an agreement entered into during the
restriction period will be void to the extent that, as a result of the transfer
or a related series of transfers either:
o a person or group of persons would become a five percent
stockholder of HomeFed as described in Treasury Regulation ss.
1.382-2T(g) and applicable attribution, aggregation and
calculation rules, or
39
<PAGE>
o the percentage stock ownership interest, as determined under
applicable Treasury Regulations, in HomeFed of any five
percent stockholder would be increased.
Any transfer of HomeFed stock in violation of these restrictions will not give
the transferee voting rights or the right to share in any dividends or
distributions on the shares transferred in violation.
A transfer of HomeFed stock will not be prohibited if the transferor or
the purported transferee obtains the approval of the HomeFed board of directors.
Our board of directors, as a condition of its approval, may require an opinion
of counsel that the transfer will not result in the application of any Section
382 limitation on the use of the tax benefits. Accordingly, because the HomeFed
common stock owned by Leucadia, and subsequently the trust, represented more
than 5% of our common stock, our board of directors, based upon opinions of tax
counsel, approved the transfer to the trust of the stock and the 1998 contracts
to buy more stock, as well as the distribution of HomeFed stock by the trust to
you.
If the HomeFed board of directors determines that any purported
transfer violated the transfer restrictions, then HomeFed may compel the
transferee to transfer the securities, together with any dividends or
distributions received, to an agent designated by the HomeFed board of directors
and the agent will effect the sale of the securities in one or more arm's length
transactions. The sales proceeds will be applied:
o first to cover the agent's expenses;
o second, any remaining amounts will be paid to the purported
transferee up to the amount paid for the securities by the
purported transferee; and
o third, any remaining amounts will be paid to one or more
charitable organizations in accordance with HomeFed's restated
certificate of incorporation.
The transfer restrictions do not apply to acquisitions of HomeFed
securities directly from HomeFed.
LIMITATION OF LIABILITY
Our restated certificate of incorporation provides that none of our
directors shall be personally liable to us or our stockholders for monetary
damages for a breach of fiduciary duty as a director, except for liability:
o for breach of that person's duty of loyalty;
o for acts or omissions not in good faith or involving
intentional misconduct or a knowing violation of law;
o for the payment of unlawful dividends and certain other
actions prohibited by Delaware corporate law; and
o for any transaction resulting in receipt by that person of an
improper personal benefit.
We maintain directors' and officers' liability insurance to provide
directors and officers with insurance coverage for losses arising from claims
based on breaches of duty, negligence, error and other wrongful acts. At
present, there is no pending litigation or proceeding, and we are not aware of
any threatened litigation or proceeding, involving any director or officer where
indemnification will be required or permitted under our restated certificate of
incorporation or our bylaws.
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<PAGE>
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
HomeFed is a Delaware corporation subject to Section 203 of the
Delaware General Corporation Law. This section provides in general that a
stockholder acquiring more than 15% but less than 85% of the outstanding voting
stock of a corporation subject to Section 203 (an "interested stockholder") may
not engage in certain business combinations as set forth in Section 203 with the
corporation for a period of three years after the date on which the stockholder
became an interested stockholder unless (i) prior to that date the corporation's
board of directors approved either the business combination or the transaction
in which the stockholder became an interested stockholder or (ii) the business
combination is approved by the corporation's board of directors and authorized
by a vote of at least 66 2/3% of the outstanding voting stock of the corporation
not owned by the interested stockholder. A "business combination" includes
mergers, asset sales and other transactions resulting in financial benefit to a
stockholder. Section 203 could prohibit or delay mergers or other takeover or
change of control attempts with respect to HomeFed and, accordingly, may
discourage attempts that might result in a premium over the market price for the
shares held by stockholders.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is American Stock
Transfer & Trust Company.
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<PAGE>
THE TRUST
The following table sets forth the number of shares of HomeFed common
stock (1) owned by the trust as of the date of this prospectus, (2) to be
distributed by the trust in the distribution, and (3) to be owned by the trust
immediately following the distribution.
<TABLE>
<CAPTION>
Shares Shares
Beneficially Beneficially
Owned Prior Shares Owned
Name and Address to Offering to be Distributed After Offering
---------------- ----------- ----------------- --------------
<S> <C> <C> <C>
Trust under Trust Agreement, dated August 14, 1998, 50,675,812 50,675,812 0
between Joseph A. Orlando, as Trustee, and Leucadia
National Corporation, for the benefit of its
shareholders
c/o Leucadia National Corporation
315 Park Avenue South
New York, New York 10010
</TABLE>
VALIDITY OF SHARES
The validity of the common stock distributed hereby will be passed upon
for HomeFed by Weil, Gotshal & Manges LLP.
EXPERTS
The consolidated financial statements of HomeFed Corporation as of
December 31, 1998 and 1997 and for each of the three years in the period ended
December 31, 1998 and the financial statements of Otay Land Company, LLC as of
December 31, 1998 and for the period from inception (October 14, 1998) through
December 31, 1998 included in this prospectus have been included in reliance on
the report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of that firm as experts in auditing and accounting.
WHERE YOU CAN GET ADDITIONAL INFORMATION
This prospectus constitutes a part of a registration statement on Form
S-2 filed by us with the SEC under the Securities Act of 1933, with respect to
the common stock that we are distributing in this prospectus. This prospectus
does not contain all the information that is contained in the registration
statement, some of which we are allowed to omit in accordance with the rules and
regulations of the SEC. We refer to the registration statement and to the
exhibits filed with the registration statement for further information with
respect to HomeFed. Copies of the registration statement and its exhibits are on
file at the offices of the SEC and may be obtained upon payment of the
prescribed fee or may be examined without charge at the public reference
facilities of the SEC described below. Statements contained in this prospectus
concerning the provisions of documents are summaries of the material provisions
of those documents, and each of those statements is qualified in its entirety by
reference to the copy of the applicable document filed with the SEC. Since this
prospectus may not contain all of the information that you may find important,
you should review the full text of these documents.
We file annual, quarterly and current reports and other documents with
the SEC under the Securities Exchange Act of 1934, and we file reports, proxy
statements and other information with the SEC. You may read and copy any of
these reports, proxy statements, other documents or the registration statement
may be inspected and copied at the SEC's public reference facilities at:
o Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549;
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<PAGE>
o Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661; and
o 7 World Trade Center, 13th Floor, New York, New York 10048.
Please call the SEC at 1-800-SEC-0330 for further information on its
public reference facilities. You can also get copies of these filings by writing
to the SEC Public Reference Section at 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates, or on the World Wide Web through commercial document
retrieval services or at the SEC's Internet address at "http://www.sec.gov."
The SEC allows us to "incorporate by reference" in this prospectus
reports that we file with them, which means that we can disclose important
information to you by referring you to those reports. Accordingly, we are
incorporating by reference in this prospectus our annual report on Form 10-K for
the fiscal year ended December 31, 1998 and our quarterly report on Form 10-Q
for the quarter ended March 31, 1999.
You may also request a free copy of any of our filings with the SEC,
other than documents that constitute exhibits to those filings, by writing or
telephoning us at the following address or phone number: Secretary, HomeFed
Corporation, 1903 Wright Place, Suite 220, Carlsbad, California 92008 (760)
918-8200.
YOU SHOULD ONLY RELY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS.
WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH ADDITIONAL OR DIFFERENT
INFORMATION. WE ARE OFFERING TO DISTRIBUTE SHARES OF COMMON STOCK ONLY IN
JURISDICTIONS WHERE THE DISTRIBUTION IS PERMITTED. THE INFORMATION IN THIS
PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE
TIME OF DELIVERY OF THIS PROSPECTUS OR OF ANY DISTRIBUTION OF COMMON STOCK.
43
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS OF HOMEFED CORPORATION
<S> <C>
Report of Independent Accountants F-1
Consolidated Balance Sheets at December 31, 1998 and 1997 F-2
Consolidated Statements of Operations for the years ended F-3
December 31, 1998, 1997 and 1996
Consolidated Statements of Changes in Stockholders' Deficit for the F-4
years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended F-5
December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements F-7
Consolidated Balance Sheets at March 31, 1999 (unaudited) and F-14
December 31, 1998
Consolidated Statements of Operations for the three months ended F-15
March 31, 1999 and 1998 (unaudited)
Consolidated Statements of Changes in Stockholder's Deficit for the F-16
three months ended March 31, 1999 and 1998 (unaudited)
Consolidated Statements of Cash Flows for the three months ended F-17
March 31, 1999 and 1998 (unaudited)
Notes to Unaudited Interim Consolidated Financial Statements F-18
FINANCIAL STATEMENTS OF OTAY LAND COMPANY, LLC
Report of Independent Accountants F-20
Balance Sheet at December 31, 1998 F-21
Statement of Operations from Inception (October 14, 1998) to F-22
December 31, 1998
Statement of Changes in Members' Capital for the Period from F-23
Inception (October 14, 1998) to December 31, 1998
Statement of Cash Flows from Inception (October 14, 1998) to F-24
December 31, 1998
Notes to Financial Statements F-25
</TABLE>
44
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of HomeFed Corporation:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, changes in stockholders' deficit and cash
flows present fairly, in all material respects, the financial position of
HomeFed Corporation (the "Company") as of December 31, 1998 and 1997, and the
results of their operations, changes in stockholders' deficit and their cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles. 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
generally accepted auditing standards 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 that our audits provide a reasonable basis for the opinion expressed
above.
/s/PricewaterhouseCoopers LLP
Salt Lake City, Utah
March 19, 1999
F-1
<PAGE>
HOMEFED CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
(Dollars in thousands, except par value)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
ASSETS
Land and real estate held for development and sale $ 4,636 $ 9,652
Cash and cash equivalents 3,120 4,195
Restricted cash 1,127 1,073
Investment in Otay Land Company, LLC 10,125 -
Other investments 79 75
Deposits and other assets 164 462
----------- ----------
TOTAL $ 19,251 $ 15,457
=========== ==========
LIABILITIES
Note payable to Leucadia Financial Corporation $ 19,736 $ 26,085
Accounts payable and accrued liabilities 802 111
----------- ----------
TOTAL LIABILITIES 20,538 26,196
----------- ----------
COMMITMENTS AND CONTINGENCIES
COMMON STOCK SUBSCRIPTION
Advance under common stock subscription 6,710 -
STOCKHOLDERS' DEFICIT
Common stock, $.01 par value,
100,000,000 shares authorized;
10,000,000 shares outstanding 100 100
Additional paid-in capital 346,919 339,904
Accumulated deficit (355,016) (350,743)
----------- -----------
TOTAL STOCKHOLDERS' DEFICIT (7,997) (10,739)
----------- -----------
TOTAL $ 19,251 $ 15,457
=========== ==========
</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, 1998, 1997 and 1996
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Sales of residential properties $ 5,752 $ 4,011 $ 8,988
Cost of sales 5,714 4,048 9,452
----------- ----------- ----------
Gross profit (loss) 38 (37) (464)
Provision for losses on real estate investments 425 153 1,583
Interest expense relating to Leucadia Financial
Corporation 2,828 2,997 3,054
Other interest expense - - 9
General and administrative expenses 1,192 597 1,171
Management fees to Leucadia Financial Corporation 138 80 143
----------- ----------- ----------
Loss from operations (4,545) (3,864) (6,424)
Other income - net 312 319 181
----------- ----------- ----------
Loss before income taxes (4,233) (3,545) (6,243)
Income tax expense (40) (32) (54)
----------- ----------- -----------
Net loss $ (4,273) $ (3,577) $ (6,297)
=========== =========== ===========
Basic loss per common share $ (0.43) $ (0.36) $ (0.63)
========== ========== ==========
Diluted loss per common share $ (0.43) $ (0.36) $ (0.63)
========== ========== ==========
</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, 1998, 1997 and 1996
(Dollars in thousands)
<TABLE>
<CAPTION>
Common
Stock Additional Total
$.01 Par Paid-in Accumulated Stockholders'
Value Capital Deficit Deficit
----- ------- ------- -------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996 $ 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)
Contribution of capital resulting from
restructuring of note payable to
Leucadia Financial Corporation 7,015 7,015
Net loss (4,273) (4,273)
------ ---------- ----------- ---------
BALANCE, DECEMBER 31, 1998 $ 100 $ 346,919 $ (355,016) $ (7,997)
====== ========== =========== =========
</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, 1998, 1997 and 1996
(Dollars in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (4,273) $ (3,577) $ (6,297)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Provision for losses on real estate investments 425 153 1,583
Accrued interest added to notes payable to
Leucadia Financial Corporation 666 2,208 2,957
Changes in operating assets and liabilities:
Land and real estate held for development and sale 4,591 3,723 6,958
Deposits and other assets 298 136 366
Accounts payable and accrued liabilities 691 (265) (218)
Decrease (increase) in restricted cash (54) 12 20
----------- ----------- ----------
Net cash provided by operating activities 2,344 2,390 5,369
----------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in other assets - - 250
Contributions to Otay Land Company, LLC (10,125) - -
Distributions from joint ventures - - 7
Decrease (increase) in other investments (4) (4) 12
----------- ----------- ----------
Net cash provided by (used in) investing activities (10,129) (4) 269
----------- ----------- ----------
</TABLE>
(CONTINUED)
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
HomeFed Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
For the years ended December 31, 1998, 1997 and 1996
(Dollars in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to notes payable to Leucadia Financing
Corporation $ - $ - $ 1,439
Repayments of notes payable to Leucadia Financing
Corporation - - (7,515)
Repayments of other notes payable - - (126)
Advance under common stock subscription 6,710 - -
---------- ---------- ---------
Net cash provided by (used in) financing activities 6,710 - (6,202)
---------- ---------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (1,075) 2,386 (564)
CASH AND CASH EQUIVALENTS, BEGINNING
OF YEAR 4,195 1,809 2,373
---------- ---------- ----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 3,120 $ 4,195 $ 1,809
========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest (net of amounts capitalized) $ 2,162 $ 789 $ 492
========== ========== ==========
Cash paid for income taxes $ 28 $ 31 $ 59
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
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"), and the
Company's wholly-owned subsidiaries, HomeFed Communities, Inc. ("HomeFed
Communities") and HomeFed Resources Corporation. The Company is engaged,
directly and through its subsidiaries, in the investment in and development of
residential real estate properties in California. All significant intercompany
balances and transactions have been eliminated in consolidation.
The Company accounts for its investment in Otay Land Company, LLC
("Otay Land Company"), under the equity method of accounting since the Company
has the ability to exert significant influence but does not control this
investment.
Certain amounts for prior periods have been reclassified to be
consistent with the 1998 presentation.
LAND AND REAL ESTATE HELD FOR DEVELOPMENT AND SALE - Land and real
estate held for development and sale is carried at the lower of cost or fair
value less costs to sell. The cost of land and real estate held for development
and sale includes all expenditures incurred in connection with the acquisition,
development and construction of the property, including interest and property
taxes. Revenue from incidental operations relating specifically to property
under development is treated as a reduction of capitalized costs. Land costs
included in land and real estate held for development and sale are allocated to
lots based on relative fair values prior to development and are charged to cost
of sales at the time of sale.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include
short-term, highly liquid investments that are readily convertible to cash. The
majority of the Company's cash and cash equivalents are held by one financial
institution in Salt Lake City, Utah.
RESTRICTED CASH - Restricted cash consists of amounts 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 with the properties. When it is determined that the
earning process is not complete, income is deferred using the installment, cost
recovery or percentage of completion methods of accounting, as appropriate.
ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect (i) the reported amounts of assets and liabilities,
(ii) the disclosure of contingent assets and liabilities at the date of the
financial statements and (iii) the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
F-7
<PAGE>
HOMEFED CORPORATION AND SUBSIDIARIES
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, this write-down is recorded as a charge
to current period operations.
CAPITALIZATION OF INTEREST AND REAL ESTATE TAXES - Interest and real
estate taxes attributable to land and home construction are capitalized and
added to the cost of those properties while the properties are being actively
developed.
2. LAND AND REAL ESTATE HELD FOR DEVELOPMENT AND SALE
A summary of land and real estate held for development and sale by
project follows:
December 31,
1998 1997
---- ----
Paradise Valley $ 4,636,000 $ 7,265,000
Silverwood - 2,387,000
------------- -------------
Total $ 4,636,000 $ 9,652,000
============= =============
Interest capitalized in land and real estate held for development and
sale in 1996 was $26,000. No interest was capitalized in land and real estate
held for development and sale during 1998 and 1997.
All land and real estate held for development and sale is property in
California and is pledged as collateral under the Amended and Restated Loan
Agreement.
3. NOTES PAYABLE
As of August 14, 1998, the Company and LFC entered into an Amended and
Restated Loan Agreement pursuant to which the Company and LFC amended the
original loan agreement dated July 3, 1995 and restructured the Company's
outstanding 12% Secured Convertible Note due 2003 ("Convertible Note") held by
LFC. The restructured note dated August 14, 1998 (the "Restructured Note") has a
principal amount of approximately $26,462,000 (reflecting the original
$20,000,000 principal balance of the Convertible Note, together with additions
to principal resulting from accrued and unpaid interest thereon to the date of
the restructuring, as allowed under the terms of the Convertible Note), extends
the maturity date from July 3, 2003 to December 31, 2004, reduces the interest
rate from 12% to 6% and eliminates the convertibility feature of the Convertible
Note. The Restructured Note is collateralized by a perfected first priority
security interest in all assets of the borrower, whether now owned or hereafter
acquired. No principal payments are due under the Restructured Note until its
maturity date.
F-8
<PAGE>
HOMEFED CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. NOTES PAYABLE, continued:
As a result of the restructuring of the Convertible Note, the
Restructured Note was recorded at fair value and the approximate $7,015,000
difference between the fair value of the Restructured Note and the carrying
value of the Convertible Note was reflected as additional paid-in capital. This
difference will be amortized as interest expense over the term of the
Restructured Note using the interest method. Approximately $289,000 was
amortized to interest expense during 1998. The carrying amount of this
Restructured Note, net of this discount for fair value, was $19,736,000 at
December 31, 1998.
Interest accrued during the years ended December 31, 1998, 1997 and
1996 of $377,000, $2,208,000 and $2,669,000, respectively, was not paid and was
added to the principal balance. Additional interest of $2,162,000, and $789,000
accrued during 1998 and 1997, respectively, was paid by the Company.
4. INVESTMENT IN OTAY LAND COMPANY, LLC
On October 14, 1998, the Company and Leucadia formed Otay Land Company
for the purpose of purchasing 4,800 acres of land located within the 22,900-acre
Otay Ranch planning area, located south of San Diego, California. The Company
initially contributed $10,000,000 as capital and Leucadia contributed
$10,000,000 as a preferred capital interest to Otay Land Company and the Company
contributed an additional $125,000 as capital in 1998; the Company will act as
development manager of this project.
The following table provides certain summarized data with respect to
Otay Land Company accounted for by the Company using the equity method of
accounting for the year ended December 31, 1998.
Assets $ 20,460,000
Liabilities 335,000
--------------
Net Assets $ 20,125,000
==============
The Company's portion of the reported net assets $ 10,125,000
==============
For information with respect to the priority of distributions from Otay
Land Company, see note 9(d).
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.
F-9
<PAGE>
HOMEFED CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. INCOME TAXES, continued:
The Company and its wholly-owned subsidiaries have NOL carryforwards
available for federal income tax purposes of $266,245,000 as of December 31,
1998, including the NOLs reattributed to the Company by HomeFed Bank and its
subsidiaries. These carryforwards were generated during 1984-1998 and expire
during 1999-2018. For state income tax purposes, available NOLs as of December
31, 1998 total $32,305,000 and expire in 1999-2013.
At December 31, the net deferred tax asset consisted of the following:
1998 1997
NOL carryforwards $ 95,789,000 $ 89,623,000
Land basis 3,081,000 6,000,000
Other 28,000 78,000
--------------- --------------
98,898,000 95,701,000
Valuation allowance (98,898,000) (95,701,000)
--------------- ---------------
$ 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
$3,197,000 and $76,100,000 in 1998 and 1997, respectively.
6. PROVISION FOR LOSSES ON REAL ESTATE INVESTMENTS
For the years ended December 31, 1998, 1997 and 1996, the Company
recorded a loss of $425,000, $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 at the Paradise Valley project 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 loss per share of Common Stock for all years presented were
calculated by dividing net loss by the 10,000,000 shares of Common Stock issued
on July 3, 1995.
Diluted loss per share of Common Stock were calculated as described
above. The number of shares used to calculate diluted loss per share was
10,000,000 for each of the years ended December 31, 1998, 1997 and 1996,
respectively. The calculation of diluted loss per share does not include Common
Stock equivalents of 49,647,893, 54,073,383 and 49,314,276, respectively, which
are antidilutive.
8. COMMITMENTS AND CONTINGENCIES
One of the Company's consolidated real estate partnerships placed
approximately $1,000,000 on deposit with a financial institution in Salt Lake
City, Utah to collateralize 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.
F-10
<PAGE>
HOMEFED CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. COMMITMENTS AND CONTINGENCIES, continued:
One of the Company's wholly-owned subsidiaries, HomeFed Communities,
must maintain a net worth of $5,000,000 and a cash balance of $400,000 in order
to ensure its ability to pay amounts which may become due under an indemnity
agreement with a third-party surety which provided security for certain
obligations of the partnership in which HomeFed Communities was a partner. If
HomeFed Communities does not 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.
9. RELATED PARTY TRANSACTIONS
The Company has entered into the following related party transactions
with Leucadia and its subsidiary, LFC.
(a) Amended Loan Agreement. As of August 14, 1998, the Company and LFC
entered into an Amended and Restated Loan Agreement, pursuant to which the
Company and LFC amended the original loan agreement dated July 3, 1995 and
restructured the outstanding Convertible Note held by LFC. The Restructured Note
has a principal amount of approximately $26,462,380 (reflecting the original
$20,000,000 principal balance of the Convertible Note, together with additions
to principal resulting from accrued and unpaid interest thereon to the date of
the restructuring, as allowed under the terms of the Convertible Note), extends
the maturity date from July 3, 2003 to December 31, 2004, reduces the interest
rate from 12% to 6% and eliminates the convertibility feature of the Convertible
Note. Interest only on the Restructured Note is paid quarterly and all unpaid
principal is due on the maturity date. During the year ended December 31, 1998,
the Company paid to LFC approximately $2,162,000 in interest on the Convertible
Note and the Restructured Note. Also during this period, interest of
approximately $377,000 was not paid and was added to the principal balance of
the Convertible Note.
As a result of the restructuring of the Convertible Note, the
Restructured Note was recorded at fair value and the approximate $7,015,000
difference between such amount and the carrying value of the Convertible Note
was reflected as additional paid-in capital. The $7,015,000 difference between
the fair value of the Restructured Note and the carrying value of the
Convertible Note will be amortized over the term of the Restructured Note using
the interest method. Approximately $289,000 was amortized as interest expense in
1998.
(b) Stock Purchase Agreements. In August and October 1998, the Company
entered into stock purchase agreements (the "Stock Purchase Agreements") with
Leucadia, pursuant to which the Company agreed to sell an aggregate of
46,557,826 additional shares of its Common Stock to Leucadia for an aggregate
purchase price of $8,380,000. In connection with the Stock Purchase Agreements,
Leucadia advanced to the Company $6,710,000 of the total purchase price, which
amount is refundable in the event the closing of the Stock Purchase Agreements
do not occur. The Stock Purchase Agreements provide that the balance of the
purchase price will be paid at the closing and that the closing will occur on or
after July 5, 1999, subject to the satisfaction of certain conditions. In 1998,
Leucadia assigned the Stock Purchase Agreements to the Leucadia Trust. Upon
consummation of the Stock Purchase Agreements, the Leucadia Trust will own 89.6%
of the Common Stock to be outstanding. The Company has been advised that,
following the purchase of Common Stock under the two Stock Purchase Agreements
and the effectiveness of a registration statement to be filed with the
Securities and Exchange Commission, the Leucadia Trust intends to distribute to
its beneficial holders all of the Company's Common Stock owned by the Trust as
promptly as practicable.
F-11
<PAGE>
HOMEFED CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. RELATED PARTY TRANSACTIONS, continued:
(c) Development Agreement. As of August 14, 1998, the Company entered
into a Development Management Agreement ("Development Agreement") with an
indirect subsidiary of Leucadia that owns certain real property located in the
City of San Marcos, County of San Diego, California, to develop a master-planned
residential project on such property. The project, known as San Elijo Hills, is
intended to be developed into a community of approximately 3,400 homes over the
next ten years. The Development Agreement provides that the Company will act as
the development manager with responsibility for the overall management of the
project, including arranging financing for the project, marketing and sales
activity, and acting as the construction manager. The Development Agreement
provides for the Company to receive a profit participation (as determined in
accordance with the Development Agreement), and fee income for project
management and marketing services based on the revenues derived from the
project.
(d) Otay Land Company, LLC. As of October 14, 1998, the Company and
Leucadia formed Otay Land Company. The Company initially contributed $10,000,000
as capital and Leucadia contributed $10,000,000 as a preferred capital interest.
The Company also contributed $125,000 as capital in 1998. The Company will act
as the manager of Otay Land Company. Otay Land Company has acquired, for
approximately $19,500,000, approximately 4,800 acres of land which is part of a
22,900-acre project located south of San Diego, California, known as Otay Ranch.
All distributions by Otay Land Company shall be distributed to the
Company and Leucadia in the following order of priority: (i) to pay Leucadia an
annual minimum cumulative preferred return of 10% on all preferred capital
contributed by Leucadia; (ii) to pay Leucadia an annual cumulative preferred
return of 2% on all preferred capital provided by Leucadia, but payable only out
of and to the extent there are profits; (iii) to repay all preferred capital
provided by Leucadia; and (iv) any remaining funds are to be distributed to the
Company.
(e) Administrative Services Agreement. Pursuant to administrative
services agreements, LFC provides administrative services to the Company,
including providing the services of two of the Company's three executive
officers. Administrative fees paid to LFC in 1998, 1997 and 1996 were $138,000,
$80,000 and $143,000, respectively. Effective March 1, 1999, the Company and LFC
entered into a new three year administrative services agreement pursuant to
which the Company will pay LFC an administrative fee of $296,101 for the first
annual period, with the fee for subsequent annual periods to be negotiated.
The Company's corporate office is located at 1903 Wright Place, Suite
220, Carlsbad, California in an office building occupied and leased by a
subsidiary of Leucadia.
(f) Silverwood Project. 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>
HOMEFED CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
11. SUBSEQUENT EVENTS
On February 2, 1999, one of the Company's consolidated partnerships
placed approximately $197,000 on deposit with a financial institution in Salt
Lake City, Utah to secure a standby letter of credit. The letter of credit was
issued to guaranty the partnership's obligation to complete landscape,
irrigation and fencing improvements at the Paradise Valley project.
On February 23, 1999, one of the Company's consolidated partnerships
sold the remaining 75 residential lots at the Paradise Valley project for
$2,250,000, less closing costs.
F-13
<PAGE>
HOMEFED CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 1999 and December 31, 1998
(Dollars in thousands, except par value)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
---- ----
(Unaudited)
<S> <C> <C>
ASSETS
Land and real estate held for development and sale $ 23,090 $ 4,636
Cash and cash equivalents 4,015 3,120
Restricted cash 1,320 1,127
Investment in Otay Land Company, LLC - 10,125
Other investments - 79
Deposits and other assets 247 164
------------- ------------
TOTAL $ 28,672 $ 19,251
============= ============
LIABILITIES
Note payable to Leucadia Financial Corporation $ 20,320 $ 19,736
Accounts payable and accrued liabilities 1,051 802
------------- ------------
Total liabilities 21,371 20,538
------------- ------------
MINORITY INTEREST 10,000 -
COMMON STOCK SUBSCRIPTION
Advance under common stock subscription 6,710 6,710
------------- ------------
STOCKHOLDERS' DEFICIT
Common Stock, $.01 par value;
100,000,000 shares authorized; 100 100
10,000,000 shares outstanding
Additional paid-in capital 346,919 346,919
Accumulated deficit (356,428) (355,016)
------------- -------------
Total stockholders' deficit (9,409) (7,997)
------------- -------------
TOTAL $ 28,672 $ 19,251
============= ============
</TABLE>
See notes to interim consolidated financial statements.
F-14
<PAGE>
HOMEFED CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended March 31, 1999 and 1998
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Sales of residential properties $ 2,250 $ 891
Costs of sales 2,218 894
------------- ------------
Gross profit (loss) 32 (3)
Provision for losses on real estate investments 255 -
Interest expense relating to Leucadia Financial Corporation 584 772
General and administrative expenses 575 131
Management fees to Leucadia Financial Corporation 74 17
------------- ------------
Loss from operations (1,456) (923)
Other income - net 52 70
------------- ------------
Loss before income taxes (1,404) (853)
Income tax expense (8) (9)
------------- -------------
Net loss $ (1,412) $ (862)
============= =============
Basic loss per common share $ (0.14) $ (0.09)
============= =============
Diluted loss per common share $ (0.14) $ (0.09)
============= =============
</TABLE>
See notes to interim consolidated financial statements.
F-15
<PAGE>
HOMEFED CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
For the three months ended March 31, 1999 and 1998
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Common
Stock Additional Total
$.01 Par Paid-in Accumulated Stockholders'
Value Capital Deficit Deficit
----- ------- ------- -------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1998 $ 100 $ 339,904 $ (350,743) $ (10,739)
Net loss (862) (862)
------- ----------- ----------- ------------
BALANCE, MARCH 31, 1998 $ 100 $ 339,904 $ (351,605) $ (11,601)
======= =========== =========== ============
BALANCE, JANUARY 1, 1999 $ 100 $ 346,919 (355,016) (7,997)
Net loss (1,412) (1,412)
------- ----------- ----------- ------------
BALANCE, MARCH 31, 1999 $ 100 $ 346,919 $ (356,428) $ (9,409)
======= =========== =========== ============
</TABLE>
See notes to interim consolidated financial statements.
F-16
<PAGE>
HOMEFED CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended March 31, 1999 and 1998
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,412) $ (862)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Provision for losses on real estate investments 255 -
Accrued interest added to note payable to Leucadia Financial Corporation 584 -
Changes in operating assets and liabilities:
Land and real estate held for development and sale 1,545 324
Deposits and other assets (83) 237
Accounts payable and accrued liabilities 120 52
Decrease (increase) in restricted cash (193) 3
----------- ----------
Net cash provided by (used in) operating activities 816 (246)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (increase) in other investments 79 (1)
----------- -----------
Net cash provided by (used in) investing activities 79 (1)
----------- -----------
Net increase (decrease) in cash and cash equivalents 895 (247)
Cash and cash equivalents, beginning of period 3,120 4,195
----------- ----------
Cash and cash equivalents, end of period $ 4,015 $ 3,948
=========== ==========
</TABLE>
See notes to interim consolidated financial statements.
F-17
<PAGE>
HOMEFED CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. The unaudited interim consolidated financial statements, which reflect all
adjustments (consisting only of normal recurring items) that management
believes are necessary to present fairly the financial position, results of
operations and cash flows, should be read in conjunction with the audited
consolidated financial statements for HomeFed Corporation for the year
ended December 31, 1998 which are included in the Company's Annual Report
on Form 10-K, as amended by Form 10-K/A, for such year (the "1998 10-K").
Results of operations for interim periods are not necessarily indicative of
annual results of operations. The consolidated balance sheet at December
31, 1998 was derived from the Company's audited consolidated financial
statements in the 1998 10-K, and does not include all disclosures required
by generally accepted accounting principles for annual financial
statements.
During the first quarter of 1999, the limited liability company agreement
governing Otay Land Company, LLC ("Otay Land Company") was amended and as a
result, the Company now has the ability to control Otay Land Company.
Accordingly Otay Land Company has been included in the Company's
consolidated financial statements. The Company previously had accounted for
this investment under the equity method of accounting; the noncash effects
on the Consolidated Statements of Cash Flows are a decrease in the
investment in Otay Land Company of $10,125,000 and an increase in minority
interest of $10,000,000.
2. In 1992, the Company filed for bankruptcy protection under Chapter 11 of
the United States Bankruptcy Code. The Company emerged from bankruptcy in
1995 pursuant to a plan of reorganization (the "Plan"). Leucadia Financial
Corporation ("LFC"), an indirect wholly-owned subsidiary of Leucadia
National Corporation ("Leucadia"), principally funded the Plan by
purchasing a $20,000,000 principal amount, 12% secured convertible note due
2003 (the "Convertible Note") and 2,700,000 shares of newly issued common
stock, par value $.01 per share ("Common Stock") of the Company. In
addition, LFC received 1,417,986 shares of Common Stock of the Company
under the Plan. These shares, together with the shares LFC purchased,
constituted 41.2% of the issued and outstanding Common Stock of the Company
following the bankruptcy.
3. In August 1998, in connection with the stock purchase agreements and
development management agreement referred to below, the Company and LFC
entered into an Amended and Restated Loan Agreement, pursuant to which the
Company and LFC restructured the outstanding Convertible Note held by LFC.
The Restructured Note has a principal amount of approximately $26,462,000
(reflecting the original $20,000,000 principal balance of the Convertible
Note, together with additions to principal resulting from accrued and
unpaid interest thereon to the date of the restructuring, as allowed under
the terms of the Convertible Note), extends the maturity date from July 3,
2003 to December 31, 2004, reduces the interest rate from 12% to 6% and
eliminates the convertibility feature of the Convertible Note. Interest
only on the Restructured Note is paid quarterly and all unpaid principal is
due on the maturity date. During the three-month period ended March 31,
1999, interest of approximately $391,000 was accrued on the Restructured
Note; this amount was paid to LFC in April 1999. As a result of the
restructuring of the Convertible Note, the Restructured Note was recorded
at fair value and the approximately $7,015,000 difference between such
amount and the carrying value of the Convertible Note was reflected as
additional paid-in capital. The $7,015,000 difference between the fair
value of the Restructured Note and the carrying value of the Convertible
Note will be amortized as interest expense over the term of the
Restructured Note using the interest method. Approximately $193,000 was
amortized as interest expense during the three-month period ended March 31,
1999.
F-18
<PAGE>
4. In August and October 1998, in connection with the execution of the
development management agreement for San Elijo Hills and the restructuring
of the Convertible Note, Leucadia entered into agreements to purchase, on
or after July 5, 1999, an additional 46,557,826 shares of Common Stock for
aggregate consideration of $8,380,000. In 1998, Leucadia irrevocably
transferred all of the Common Stock that it beneficially owned, together
with the stock purchase agreements, to a trust (the "Leucadia Trust")
formed for the benefit of Leucadia shareholders of record as of August 25,
1998 (the "Trust Beneficiaries"). The Leucadia Trust currently holds the
41.2% of the Company's issued and outstanding Common Stock that LFC
acquired under the Plan, together with the stock purchase agreements. Upon
consummation of the purchases under these stock purchase agreements, the
Leucadia Trust will beneficially own 89.6% of the issued and outstanding
Common Stock of the Company. Pursuant to the terms of the agreement
governing the Leucadia Trust, the Leucadia Trust will terminate on the
earlier of: (i) the date when all of the Company's Common Stock and any
rights remaining under the stock purchase agreements have been distributed
to the Trust Beneficiaries or (ii) December 31, 2001. The Company has been
advised that, as promptly as practicable following the purchase of Common
Stock under the two stock purchase agreements and the effectiveness of a
registration statement to be filed with the Securities and Exchange
Commission, the Leucadia Trust intends to distribute to its beneficial
holders all of the Company's Common Stock then owned by the Leucadia Trust.
5. Basic loss per share of Common Stock for all periods presented was
calculated by dividing the net loss by the 10,000,000 shares of Common
Stock outstanding for the periods.
Diluted loss per share of Common Stock was calculated as described above.
The number of shares used to calculate diluted loss per share was
10,000,000 for 1999 and 1998. The calculation of diluted loss per share
does not include Common Stock equivalents of 46,557,826 and 54,400,000 for
1999 and 1998, respectively, which are antidilutive.
6. As of October 14, 1998, the Company and Leucadia formed Otay Land Company.
The Company initially contributed $10,000,000 as capital and Leucadia
contributed $10,000,000 as a preferred capital interest. The Company also
contributed $125,000 as capital in 1998 and $450,000 during the three-month
period ended March 31, 1999. The Company is the manager of Otay Land
Company. Otay Land Company has acquired, for approximately $19,500,000,
approximately 4,800 acres of land which is part of a 22,900-acre project
located south of San Diego, California, known as Otay Ranch. Distributions
of net income from this investment first will be paid to Leucadia until it
has received an annual cumulative preferred return of 12% on, and repayment
of, its preferred investment. Any remaining funds are to be distributed to
the Company.
7. Pursuant to administrative services agreements, LFC provides administrative
services to the Company, including providing the services of two of the
Company's three executive officers. Effective March 1, 1999, the Company
and LFC entered into a new three year administrative services agreement
pursuant to which the Company will pay LFC an administrative fee of
$296,101 for the first annual period, with the fee for subsequent annual
periods to be negotiated. Fees paid by the Company to LFC totaled $74,000
for the three-month period ended March 31, 1999.
The Company rents office space and furnishings from a subsidiary of
Leucadia for a monthly amount equal to its share of the Leucadia
subsidiary's cost for such space and furnishings. For the three months
ended March 31, 1999, the Company accrued $37,000 in rental expense,
related to space provided by Leucadia or its affiliates, to the Leucadia
subsidiary.
F-19
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Members of
Otay Land Company, LLC
In our opinion, the accompanying balance sheet and the related statements of
operations, of members' capital and of cash flows present fairly, in all
material respects, the financial position of Otay Land Company, LLC (the
"Company") at December 31, 1998, and the results of its operations and its cash
flows for the period from inception (October 14, 1998) to December 31, 1998, in
conformity with generally accepted accounting principles. 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 audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards 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 that our audit provides a reasonable basis for the opinion expressed
above.
/S/PRICEWATERHOUSECOOPERS LLP
Salt Lake City, Utah
March 19, 1999
F-20
<PAGE>
Otay Land Company, LLC
Balance Sheet
<TABLE>
<CAPTION>
DECEMBER 31,
1998
----
<S> <C>
ASSETS
ASSETS
Land held for development......................................................... $ 20,407,694
Cash and cash equivalents......................................................... 52,111
--------------
Total........................................................................ $ 20,459,805
==============
LIABILITIES AND MEMBERS' CAPITAL
Accounts payable and accrued liabilities.......................................... $ 334,669
--------------
Total liabilities............................................................ 334,669
--------------
MEMBERS' CAPITAL
Preferred capital (liquidation preference of $10,000,068)......................... 10,000,068
Capital........................................................................... 10,125,068
--------------
Total members' capital....................................................... 20,125,136
--------------
Total liabilities and members' capital....................................... $ 20,459,805
==============
</TABLE>
F-21
<PAGE>
OTAY LAND COMPANY, LLC
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION
(OCTOBER 14, 1998)
TO DECEMBER 31, 1998
--------------------
<S> <C>
OPERATING EXPENSES
General and administrative expenses................................... $ (10,883)
-----------
Loss from operations............................................. (10,883)
OTHER INCOME
Interest income....................................................... 11,019
----------
Net income....................................................... $ 136
==========
</TABLE>
F-22
<PAGE>
OTAY LAND COMPANY, LLC
STATEMENT OF CHANGES IN MEMBERS' CAPITAL
FOR THE PERIOD FROM INCEPTION (OCTOBER 14, 1998) TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
PREFERRED
CAPITAL CAPITAL TOTAL
------- ------- -----
<S> <C> <C> <C>
Preferred capital contribution................... $ 10,000,000 $ 10,000,000
Capital contribution............................. $ 10,125,000 10,125,000
Net income for the period from inception
(October 14, 1998)
to December 31, 1998.......................... 68 68 136
-------------- -------------- --------------
Total members' capital................... $ 10,000,068 $ 10,125,068 $ 20,125,136
============== ============== ==============
</TABLE>
F-23
<PAGE>
OTAY LAND COMPANY, LLC
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION
(OCTOBER 14, 1998)
TO DECEMBER 31, 1998
--------------------
<S> <C>
Cash flows from operating activities:
Net income............................................................ $ 136
Adjustments to reconcile net income to net cash used in operating
activities:
Changes in operating assets and liabilities:
Land held for development..................................... (20,407,694)
Accounts payable and accrued liabilities...................... 334,669
--------------
Net cash used in operating activities..................... (20,072,889)
---------------
Cash flows from financing activities:
Preferred capital contribution........................................ 10,000,000
Capital contribution.................................................. 10,125,000
--------------
Net cash provided by financing activities................. 20,125,000
--------------
Net increase in cash and cash equivalents................................ 52,111
Cash and cash equivalents, at inception (October 14, 1998)............... -
--------------
Cash and cash equivalents, December 31, 1998............................. $ 52,111
==============
</TABLE>
F-24
<PAGE>
OTAY LAND COMPANY, LLC
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND ORGANIZATION
Otay Land Company, LLC (the "Company") is a limited liability company
that was organized in October 1998 under terms of a Limited Liability
Company Agreement (the "Agreement"). The two Members of the Company are
HomeFed Corporation ("HomeFed") and Leucadia National Corporation
("LNC"). The Company is engaged in the investment in and development of
master-planned communities in Southern California.
LAND HELD FOR DEVELOPMENT
Land held for development is carried at the lower of cost or fair value
less costs to sell. The cost of land held for development includes all
expenditures incurred in connection with the acquisition and
development of the property, including interest and property taxes,
while the properties are being actively developed.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include short-term, highly liquid investments
that are readily convertible to cash.
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, the 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.
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.
F-25
<PAGE>
OTAY LAND COMPANY, LLC
NOTES TO FINANCIAL STATEMENTS (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued):
INCOME TAXES
The Company is not subject to income taxes; the individual members are
required to report their distributive share of the Company's realized
income, gain, loss, deductions or credits on their respective income
tax returns.
2. MEMBERS' CAPITAL
Each member of the Company contributed capital in order to gain an
interest in the Company. The two types of capital outlined in the
Agreement include ordinary capital and preferred capital, which are
held by HomeFed and LNC, respectively. As holder of the preferred
capital, LNC is entitled to the following distribution of profits, in
order of priority:
1. An annual minimum cumulative preferred return of 10% on all
preferred capital, of which there is $208,000 in arrears as of
December 31, 1998;
2. An annual minimum cumulative preferred return of 2% on all
preferred capital, provided that this shall be payable to LNC
only out of and to the extent of profits;
3. To repay all of the preferred capital provided by LNC;
4. Any remaining funds will be distributed to HomeFed.
According to the terms of the Agreement, the Manager of the Company
shall be selected by the unanimous vote of the Members; however, as
long as LNC holds preferred capital, LNC shall select the Manager. In
addition, as long as LNC holds preferred capital, only LNC may remove
the Manager of the Company. Currently, LNC has selected HomeFed to be
the Manager of the Company. The officers of the Company are to be
elected by a unanimous vote of the members; however, as long as LNC
holds preferred capital, it shall select the officers of the Company.
F-26
<PAGE>
HOMEFED CORPORATION
50,675,812 SHARES
COMMON STOCK
---------------
PROSPECTUS
---------------
, 1999
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the expenses payable by the registrant
in connection with this registration statement. All such expenses are estimates,
other than the filing fees payable to the SEC:
SEC registration fee $ 7,044
Printing
Accounting fees and expenses
Legal fees and expenses
Miscellaneous
-----------------
Total $
=================
All amounts except the SEC registration fee are estimated.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Registrant is a Delaware corporation. Subsection (b) (7) of Section
102 of the Delaware General Corporation Law (the "DGCL") enables a corporation
in its original certificate of incorporation or an amendment thereto to
eliminate or limit the personal liability of a director to the corporation or
its stockholders for monetary damages for violations of the director's fiduciary
duty, except (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii)
pursuant to Section 174 of the DGCL (providing for liability of directors for
unlawful payment of dividends or unlawful stock purchases or redemptions) or
(iv) for any transaction from which a director derived an improper personal
benefit. Article 8 of the Restated Certificate of Incorporation of the
Registrant (the "Restated Certificate") provides that, to the fullest extent
permitted by the DGCL, no director of the Registrant shall be personally liable
to the corporation or any of its stockholders for monetary damages for breach of
fiduciary duty as a director.
Article 9 of the Restated Certificate provides for the indemnification
of directors and officers to the extent permitted by the DGCL. Subsection (a) of
Section 145 of the DGCL empowers a corporation to indemnify any director or
officer, or former director of officer, who was or is a party or is threatened
to be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative (other than
an action by or in the right of the corporation) by reason of the fact that such
person is or was a director or officer of the corporation or is or was serving
at the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred in connection with such action,
suit or proceeding provided that such director of officer acted in good faith in
a manner reasonably believed to be in, or not opposed to, the best interests of
the corporation, and, with respect to any criminal action or proceeding,
provided further that such director or officer has no reasonable cause to
believe his conduct was unlawful.
Subsection (b) of Section 145 empowers a corporation to indemnify any
director or officer, or former director or officer, who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that such person acted in any of the capacities set forth
above, against expenses (including attorneys' fees) actually and reasonably
II-1
<PAGE>
incurred in connection with the defense or settlement of such action or suit
provided that such director or officer acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of the
corporation, except that no indemnification may be made in respect of any claim,
issue or matter as to which such director of officer shall have been adjudged to
be liable to the corporation unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall determine
upon application that despite the adjudication of liability but in view of all
of the circumstances of the case, such director of officer is fairly and
reasonably entitled to indemnity for such expenses which the Court of Chancery
or such other court shall deem proper.
Section 145 further provides that (i) to the extent a director or
officer of a corporation has been successful in the defense of any action, suit
or proceeding referred to in subsections (a) and (b) or in the defense of any
claim, issue or matter therein, he shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection therewith; and (ii) indemnification and advancement of expenses
provided for, by, or granted pursuant to, Section 145 shall not be deemed
exclusive of any other rights to which the indemnified party may be entitled. In
addition, Section 145 empowers the corporation to purchase and maintain
insurance on behalf of any person who is or was a director or officer of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him or
incurred by him in any such capacity, or arising out of his status as such,
whether or not the corporation would have the power to indemnify him against
such liabilities under Section 145.
II-2
<PAGE>
ITEM 16. EXHIBITS
Exhibit
Number Description
- ------ -----------
2.1 Amended Disclosure Statement to HomeFed's Fourth Amended Plan of
Reorganization Dated July 15, 1994 (incorporated by reference to
Exhibit 2.1 to HomeFed's current report on Form 8-K dated June 14,
1995).
2.2 HomeFed's Fourth Amended Plan of Reorganization Dated July 15, 1994
(incorporated by reference to Exhibit 2.2 to HomeFed's current report
on Form 8-K dated June 14, 1995).
2.3 Order Modifying and Confirming HomeFed's Fourth Amended Plan of
Reorganization Dated July 15, 1994 (incorporated by reference to
Exhibit 2.3 to HomeFed's current report on Form 8-K dated June 14,
1995).
3.1 Restated Certificate of Incorporation, as restated July 3, 1995 of
HomeFed (incorporated by reference to Exhibit 3.1 to HomeFed's
quarterly report on Form 10-Q for the quarter ended September 30,
1995).
3.2 By-laws of HomeFed as amended through November 10, 1995 (incorporated
by reference to Exhibit 3.2 to HomeFed's quarterly report on Form 10-Q
for the quarter ended September 30, 1995).
5 Opinion of Weil, Gotshal & Manges LLP as to the validity of the
securities offered hereby.(1)
10.1 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 HomeFed's quarterly
report on Form 10-Q for the quarter ended September 30, 1996).
10.2 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 HomeFed's quarterly
report on Form 10-Q for the quarter ended September 30, 1996).
10.3 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 HomeFed's quarterly
report on Form 10-Q for the quarter ended September 30, 1996).
10.4 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 HomeFed's quarterly
report on Form 10-Q for the quarter ended September 30, 1996).
10.5 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 HomeFed's quarterly
report on Form 10-Q for the quarter ended September 30, 1996).
- ------------------------
(1) To be filed by amendment.
II-3
<PAGE>
Exhibit
Number Description
- ------ -----------
10.6 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 HomeFed's quarterly
report on Form 10-Q for the quarter ended September 30, 1996).
10.7 Real Estate Purchase Agreement and Escrow Instructions between
Southfork Partnership and Northfork Communities (incorporated by
reference to Exhibit 10.1 to HomeFed's quarterly report on Form 10-Q
for the quarter ended June 30, 1998).
10.8 Amended and Restated Loan Agreement between HomeFed and Leucadia, dated
as of August 14, 1998 (incorporated by reference to Exhibit 10.2 to
HomeFed's current report on Form 8-K dated August 14, 1998).
10.9 Development Management Agreement between HomeFed and Provence Hills
Development Company, LLC, dated as of August 14, 1998 (incorporated by
reference to Exhibit 10.3 to HomeFed's current report on Form 8-K dated
August 14, 1998).
10.10 Stock Purchase Agreement between HomeFed and Leucadia, dated as of
August 14, 1998 (incorporated by reference to Exhibit 10.1 to HomeFed's
current report on Form 8-K dated August 14, 1998).
10.11 Amended and Restated Limited Liability Company Agreement of Otay Land
Company, LLC, dated as of October 14, 1998, between HomeFed and
Leucadia National Corporation (incorporated by reference to Exhibit
10.12 to HomeFed's quarterly report on Form 10-Q for the quarter ended
September 30, 1998).
10.12 Stock Purchase Agreement, dated as of October 20, 1998, between HomeFed
and Leucadia (incorporated by reference to Exhibit 10.1 to HomeFed's
quarterly report on Form 10-Q for the quarter ended September 30,
1998).
10.13 Administrative Services Agreement, dated as of March 1, 1999 between
Leucadia Financial, HomeFed, HomeFed Resources Corporation and HomeFed
Communities, Inc. (incorporated by reference to Exhibit 10.14 to
HomeFed's annual report on Form 10-K for the year ended December 31,
1998).
10.14 Amended and Restated Limited Liability Company Agreement of Otay Land
Company, LLC, dated as of March 31, 1999, among HomeFed and Leucadia
National Corporation (incorporated by reference to Exhibit 10.1 to
HomeFed's quarterly report on Form 10-Q for the quarter ended March 31,
1999).*
10.15 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.*
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Weil, Gotshal & Manges LLP (included in the opinion to be
filed as Exhibit 5 to this Registration Statement).*
- ------------------------
* To be filed by amendment.
II-4
<PAGE>
Exhibit
Number Description
- ------ -----------
24 Power of Attorney.**
99 Trust Agreement, dated August 14, 1998, between Leucadia National
Corporation for the benefit of its shareholders, and Joseph A. Orlando,
as Trustee.
- -------------------------------
* To be filed by amendment.
** Previously filed.
II-5
<PAGE>
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes that:
The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
given, the latest annual report, to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X is not set forth in the prospectus, to deliver, or
cause to be delivered to each person to whom the prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
the requirements for filing on Form S-2 and has duly caused this Amendment to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Carlsbad, State of California, on this
21st day of July, 1999.
HOMEFED CORPORATION
By: /s/ CORINNE A. MAKI
----------------------------------
Corinne A. Maki
Secretary and Treasurer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons on behalf
of the registrant and in the capacities indicated, on the date set forth above.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Chairman of the Board and Director July 21, 1999
- ---------------------------------
(Timothy Considine)
* President and Director July 21, 1999
- --------------------------------- (Principal Executive Officer)
(Paul J. Borden)
/s/ CORINNE A. MAKI Secretary and Treasurer July 21, 1999
- --------------------------------- (Principal Financial and Accounting
(Corinne A. Maki) Officer)
* Director July 21, 1999
- ---------------------------------
(Patrick D. Bienvenue)
* Director July 21, 1999
- ---------------------------------
(Ian M. Cumming)
* Director July 21, 1999
- ---------------------------------
(Michael A. Lobatz)
* Director July 21, 1999
- ---------------------------------
(Joseph S. Steinberg)
</TABLE>
* By: /s/ CORINNE A. MAKI
--------------------------
(Corinne A. Maki)
(Attorney-in-Fact)
II-7
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
2.1 Amended Disclosure Statement to HomeFed's Fourth Amended Plan of
Reorganization Dated July 15, 1994 (incorporated by reference to
Exhibit 2.1 to HomeFed's current report on Form 8-K dated June 14,
1995).
2.2 HomeFed's Fourth Amended Plan of Reorganization Dated July 15, 1994
(incorporated by reference to Exhibit 2.2 to HomeFed's current report
on Form 8-K dated June 14, 1995).
2.3 Order Modifying and Confirming HomeFed's Fourth Amended Plan of
Reorganization Dated July 15, 1994 (incorporated by reference to
Exhibit 2.3 to HomeFed's current report on Form 8-K dated June 14,
1995).
3.1 Restated Certificate of Incorporation, as restated July 3, 1995 of
HomeFed (incorporated by reference to Exhibit 3.1 to HomeFed's
quarterly report on Form 10-Q for the quarter ended September 30,
1995).
3.2 By-laws of HomeFed as amended through November 10, 1995 (incorporated
by reference to Exhibit 3.2 to HomeFed's quarterly report on Form 10-Q
for the quarter ended September 30, 1995).
5 Opinion of Weil, Gotshal & Manges LLP as to the validity of the
securities offered hereby.*
10.1 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 HomeFed's quarterly
report on Form 10-Q for the quarter ended September 30, 1996).
10.2 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 HomeFed's quarterly
report on Form 10-Q for the quarter ended September 30, 1996).
10.3 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 HomeFed's quarterly
report on Form 10-Q for the quarter ended September 30, 1996).
10.4 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 HomeFed's quarterly
report on Form 10-Q for the quarter ended September 30, 1996).
10.5 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 HomeFed's quarterly
report on Form 10-Q for the quarter ended September 30, 1996).
- ------------------------
* To be filed by amendment.
II-8
<PAGE>
Exhibit
Number Description
- ------ -----------
10.6 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 HomeFed's quarterly
report on Form 10-Q for the quarter ended September 30, 1996).
10.7 Real Estate Purchase Agreement and Escrow Instructions between
Southfork Partnership and Northfork Communities (incorporated by
reference to Exhibit 10.1 to HomeFed's quarterly report on Form 10-Q
for the quarter ended June 30, 1998).
10.8 Amended and Restated Loan Agreement between HomeFed and Leucadia, dated
as of August 14, 1998 (incorporated by reference to Exhibit 10.2 to
HomeFed's current report on Form 8-K dated August 14, 1998).
10.9 Development Management Agreement between HomeFed and Provence Hills
Development Company, LLC, dated as of August 14, 1998 (incorporated by
reference to Exhibit 10.3 to HomeFed's current report on Form 8-K dated
August 14, 1998).
10.10 Stock Purchase Agreement between HomeFed and Leucadia, dated as of
August 14, 1998 (incorporated by reference to Exhibit 10.1 to HomeFed's
current report on Form 8-K dated August 14, 1998).
10.11 Amended and Restated Limited Liability Company Agreement of Otay Land
Company, LLC, dated as of October 14, 1998, between HomeFed and
Leucadia National Corporation (incorporated by reference to Exhibit
10.12 to HomeFed's quarterly report on Form 10-Q for the quarter ended
September 30, 1998).
10.12 Stock Purchase Agreement, dated as of October 20, 1998, between HomeFed
and Leucadia (incorporated by reference to Exhibit 10.1 to HomeFed's
quarterly report on Form 10-Q for the quarter ended September 30,
1998).
10.13 Administrative Services Agreement, dated as of March 1, 1999 between
Leucadia Financial, HomeFed, HomeFed Resources Corporation and HomeFed
Communities, Inc. (incorporated by reference to Exhibit 10.14 to
HomeFed's annual report on Form 10-K for the year ended December 31,
1998).
10.14 Amended and Restated Limited Liability Company Agreement of Otay Land
Company, LLC, dated as of March 31, 1999, among HomeFed and Leucadia
National Corporation (incorporated by reference to Exhibit 10.1 to
HomeFed's quarterly report on Form 10-Q for the quarter ended March 31,
1999).*
10.15 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.*
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Weil, Gotshal & Manges LLP (included in the opinion to be
filed as Exhibit 5 to this Registration Statement).*
- -----------------------
* To be filed by amendment.
II-9
<PAGE>
Exhibit
Number Description
- ------ -----------
24 Power of Attorney.**
99 Trust Agreement, dated August 14, 1998, between Leucadia National
Corporation for the benefit of its shareholders, and Joseph A. Orlando,
as Trustee.
- -----------------------
* To be filed by amendment.
** Previously filed.
II-10
Exhibit 23.2
------------
Consent of Independent Accountants
----------------------------------
We hereby consent to the use in this amended Registration Statement on Form S-2
of our report dated March 19, 1999 relating to the financial statements of
HomeFed Corporation and Subsidiaries and our report dated March 19, 1999
relating to the financial statements of Otay Land Company, LLC, which appear in
such amended Registration Statement. We also consent to the reference to us
under the heading "Experts" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
Salt Lake City, Utah
July 20, 1999
#779654 v1
Exhibit 99
----------
TRUST AGREEMENT
---------------
THIS TRUST AGREEMENT (the "Agreement") is made this 14th day of
August, 1998, between Leucadia National Corporation ("Leucadia") for the benefit
of its shareholders, and Joseph A.
Orlando (the "Trustee").
WHEREAS, Leucadia is the beneficial owner of 4,117,986 shares of
common stock of HomeFed Corporation (the "Owned HomeFed Common Stock") which
represents approximately 41% of the outstanding shares of common stock of
HomeFed Corporation ("HomeFed Stock"); and
WHEREAS, Leucadia has entered into a Stock Purchase Agreement, dated
as of August 14, 1998 (the "Purchase Agreement"), among Leucadia and HomeFed
Corporation, pursuant to which Leucadia is entitled and obligated to purchase
for an aggregate purchase price of $6,670,100, a portion of which has already
been paid (the "Purchase Price") a number of additional shares of common stock
of HomeFed Corporation (the "Additional HomeFed Stock" and together with the
Owned HomeFed Stock, the "HomeFed Stock Interest") such that Leucadia would
beneficially own 87.5% of the outstanding shares of HomeFed Stock, ; and
WHEREAS, Leucadia wishes to convey all of its right, title and
interest in and to the HomeFed Stock Interest and all of its right, title and
interest in and to the Purchase Agreement and the remainder of the Purchase
Price, together with any right, title and interest that Leucadia may acquire on
or before November 10, 1998 in and to additional shares of HomeFed Stock or any
contract to acquire shares of HomeFed Stock, together with the purchase price
for such shares (collectively, the "Trust Property"), to and for the benefit of
and account of the holders of common shares, par value $1.00 per share, of
Leucadia as of August 25, 1998 (the "Beneficiaries"); and
WHEREAS, the Trustee has agreed to act as the Trustee under this
Agreement for the purposes herein provided;
NOW, THEREFORE, in consideration of the premises and of the
acceptance by the Trustee of the Trust hereby created and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged by the parties hereto, the parties hereby agree as follows:
NYFS04...:\30\76830\0194\2037\AGR8068V.43K
<PAGE>
ARTICLE 1
THE TRUST
Section 1.1 All of Leucadia's right, title and interest in and to
the Trust Property is hereby vested in the Trust. Any property that may in the
future be vested in the Trust pursuant to the provisions of this Agreement shall
thereafter also be considered Trust Property. To the extent any law or
regulation prohibits the transfer of ownership of any of the Trust Property from
Leucadia to the Trustee, the Trustee's interest shall be a lien upon and
security interest in such Trust Property, in trust, nevertheless, for the sole
use and purposes set forth in Section 2.1, and this Agreement shall be deemed a
security agreement granting such interest thereon.
Section 1.2 Leucadia shall, upon reasonable request of the Trustee,
execute, acknowledge and deliver such further instruments and do such further
acts as may be necessary or appropriate to more effectively vest in the Trust
any portion of the Trust Property intended to be vested herein.
ARTICLE 2
PURPOSES OF THE TRUST
Section 2.1 The purposes of this Trust are (i) to hold the assets
transferred to it by Leucadia on behalf of the Beneficiaries and collect income
derived from such assets, (ii) to close the transaction contemplated by the
Purchase Agreement, (iii) to take such other action as is necessary to conserve
and protect the Trust Property, and (iv) to liquidate and distribute the Trust
Property.
ARTICLE 3
POWERS OF TRUSTEE
Section 3.1 The Trustee accepts and undertakes to discharge the
Trust created by this Agreement upon the terms and conditions hereof and agrees,
for the benefit of the Beneficiaries, to exercise such of the rights and powers
vested in it by this Agreement in the same manner, and use the same degree of
care and skill in its exercise, as a prudent person would exercise and use under
the circumstances in the conduct of
2
<PAGE>
his own affairs, having due regard to the purposes of the Trust set forth in
Article 2 hereof.
Section 3.2 In accepting the Trust hereby created, the Trustee acts
solely as Trustee hereunder, and all persons having any claim against the
Trustee in connection with its performance of its rights, powers and duties as
such Trustee shall only look to the Trust Property for payment or satisfaction
thereof.
Section 3.3 The Trustee shall not commingle any of the Trust
Property with its own property or the property of any other person.
Section 3.4 The Trustee is hereby empowered to:
(a) perform all of the obligations and agreements of
the Trust provided for in this Agreement;
(b) make payment under the Purchase Agreement and perform any other
obligations and agreements under the Purchase Agreement necessary for the
issuance by HomeFed Corporation of the Additional HomeFed Stock;
(c) keep and maintain an account in the name of the Trustee for the
benefit of the Beneficiaries into which the Trustee shall deposit all
Trust Property consisting of cash or cash equivalents (the "Trust
Account"); the Trustee shall not permit any person other than the Trustee
to have authority to make withdrawals from, or to issue drafts against,
the Trust Account and no Trust Account may be maintained with any bank
unless such bank has been furnished a copy of this Agreement;
(d) collect and receive all sums of money or other property due to
the Trust;
(e) engage professionals, including attorneys, accountants, experts
and others, to assist the Trustee in carrying out its duties hereunder;
(f) receive additional Trust Property and take all appropriate
action necessary to preserve the value of Trust Property as the Trustee in
the reasonable exercise of its discretion shall determine, subject to
Article 4 hereof;
(g) vote and/or act with respect to the disposition of the Owned
HomeFed Common Stock and, upon issuance, the Additional HomeFed Stock and
any other shares
3
<PAGE>
of common stock of HomeFed Corporation that may then be Trust Property as
directed in a written notice jointly signed by mutual agreement of Ian M.
Cumming and Joseph S. Steinberg, each of whom is a Beneficiary of the
Trust and, accordingly, are together thereby acting on behalf of all of
the Beneficiaries;
(h) pay all reasonable and necessary Trust expenses incurred in the
administration of the Trust, including without limitation, attorneys' fees
and disbursements, accounting fees, expert fees and other costs and
expenses arising out of the consummation of the transactions contemplated
by the Purchase Agreement;
(i) prepare and deliver written statements or notices, annually or
otherwise, required by law to be delivered to Beneficiaries; provided that
the Trustee shall have no obligation to deliver any statements or notices
to a permitted transferee of a beneficial trust interest unless, prior to
the date on which the statement or notice is required to be delivered, the
Trustee receives (1) written notice adequately identifying the permitted
transferee (including the transferee's name, address and tax
identification number), and (2) reasonable evidence that the transfer was
authorized by this Agreement;
(j) to file and execute, on behalf of the Trust such applications,
surety bonds, irrevocable consents, appointments of attorney for service
of process and other papers and documents that shall be necessary or
desirable to register or establish the exemption from registration of the
HomeFed Stock Interest, and/or any additional shares of common stock of
HomeFed Corporation that may become Trust Property, under the Securities
Act of 1933, as amended (the "Securities Act"), and under state securities
or blue sky laws and to otherwise assist in the registration of such
shares of common stock of HomeFed Corporation;
(k) maintain and preserve the originals of any and all instruments
and documents pertaining to Trust Property; and
(l) take any of the foregoing action, and execute any documents
relating thereto, in the Trustee's own name, on behalf of the Trust.
Notwithstanding any other provision of this Agreement, the Trustee
shall not, and is not empowered to, acquire any property after the date hereof
other than the Trust Property (and
4
<PAGE>
any proceeds arising therefrom) or vary the investment of the Trust within the
meaning of Treasury Regulation Section 301.7701- 4(c)(i).
Section 3.5 The Trustee shall prepare or have prepared, and file on
behalf of the Trust all United States, federal, state and local income tax
returns and information returns required to be filed by the Trust, and shall
prepare and distribute to the Beneficiaries any reports regarding any income,
gain, deduction, credit or loss of the Trust as are required by applicable law
and, in addition thereto, as the Trustee in its sole discretion may from time to
time determine is appropriate or necessary to enable the Beneficiaries to
determine their respective tax obligations arising out of operations of the
Trust.
Section 3.6 The Trustee may withhold from the amount distributable
from the Trust at any time to any person such sum or sums as may be sufficient
to pay any taxes which have been or may be imposed on such person or upon the
Trust with respect to the amount distributable or to be distributed under the
income tax laws of the United States or of any state or political subdivision or
entity by reason of any distribution provided for hereunder, wherever such
withholding is determined by the Trustee in its reasonable sole discretion to be
required.
Section 3.7 The Trustee shall maintain records and books of account
relating to the Trust Property, in accordance with generally accepted accounting
principles consistently applied and shall, at all reasonable times, permit any
authorized representative designated by a Beneficiary to have access, during
normal business hours and upon reasonable notice, to inspect and/or copy (at
Beneficiary's expense payable at the time of copying), the financial records
relating to the Trust Property. The Trustee shall provide to each Beneficiary,
as soon as practicable after each anniversary of its creation and, in addition,
after termination of the Trust, an unaudited financial statement and a report
showing all transactions and the amounts thereof (including all sales or other
dispositions of Trust Property and expenses relating to the operation of the
Trust) consummated during the reporting period.
Section 3.8 The Trustee may rely upon and shall be protected in
acting or refraining from acting upon any certificates, opinions, statements,
instruments or reports believed by it to be genuine and to have been signed or
presented by the proper person or persons; provided, however, that the Trustee
shall be under a duty to have examined the same to
5
<PAGE>
determine whether or not such writings conform to the requirements of this
Agreement.
Section 3.9 The Trustee and its agents shall not be liable for any
error of business judgment or with respect to any action taken or omitted to be
taken by them in their capacity as Trustee or agent, unless it shall be proved
that the Trustee or its agents shall have been grossly negligent or shall have
acted with willful misconduct in ascertaining the pertinent facts or in
performing any of their rights, powers or duties hereunder. In the event such
liability is proven, the Beneficiaries shall be entitled to reimbursement of
their reasonable costs, including attorneys' fees and disbursements. The Trustee
makes no representations as to the value or condition of the Trust Property or
any part thereof, or as to the security afforded by this Agreement, or as to the
validity, execution (except its own execution), enforceability, legality or
sufficiency of this Agreement, and the Trustee shall incur no liability or
responsibility in respect of such matters.
Section 3.10 The Trustee shall have no duty to accomplish any
recording, filing or registration of any instrument (including any financing or
continuation statement or any filing under tax or securities law) or any
rerecording, refiling or reregistration thereof.
Section 3.11 The Trustee shall be indemnified by and receive
reimbursement from the Trust against and from any and all loss, liability, cost,
damage or expense, including reasonable attorneys' fees and disbursements, which
it may incur or sustain in the exercise and performance of any of its powers and
duties as such Trustee under this Agreement, unless such loss, liability, cost,
damage or expense shall be incurred or sustained as a result of the Trustee's
gross negligence or willful misconduct.
ARTICLE 4
PERMITTED INVESTMENTS OF TRUST PROPERTY
Section 4.1 The cash constituting the remainder of the Purchase
Price shall, to the extent permitted by applicable law and to the extent
provided in Section 4.2, be invested by the Trustee as soon as practicable after
establishment of the Trust in state or local government securities with a
maturity date on or about June 15, 1999 and the income from which will not
result in any federal tax liabilities to the Beneficiaries. All
6
<PAGE>
investments of Trust Property shall be made in a manner such that the Trust will
at all times be classified as a grantor trust of which the Beneficiaries are the
grantors for United States federal income tax purposes (each such investment, a
"Permitted Investment"); provided, however, that (i) each Permitted Investment
shall be held solely in the name of the Trustee as Trustee, (ii) to the extent
practicable, the Trustee shall take physical possession of all such securities
and secure them in a safe deposit box registered solely in the name of the
Trustee as Trustee, and (iii) no Permitted Investment may be made unless the
Trustee shall furnish the bank or brokerage firm through which such Permitted
Investment is made with a copy of this Agreement, and such bank shall have
acknowledged to the Trustee in writing that upon the maturity of such Permitted
Investment the proceeds thereof, if not reinvested in a Permitted Investment in
accordance with the instructions of the Trustee, shall be deposited solely in a
Trust Account in accordance with Section 3.4(c).
Section 4.2 The Trustee may pay litigation and administrative
expenses, deposit money from the Trust Account in one or more FDIC insured
demand deposit accounts at any bank or trust company, excluding that of the
Trustee, which has a capital stock and surplus aggregating at least
$100,000,000; provided that total deposits in each account and with each
institution do not exceed the FDIC insurance limits for such account or
accounts.
Section 4.3 All Permitted Investments shall be on terms consistent
with the distribution requirements of Article 7 of this Agreement and the other
obligations of the Trust.
Section 4.4 Any of the foregoing investments purchased with any of
the Trust Property shall be deemed a part of the Trust Property. Any earned
interest, dividends, distributions or gains from Permitted Investments shall be
included in the Trust Property.
ARTICLE 5
CONCERNING THE TRUSTEE
Section 5.1 The Trustee may resign as Trustee at any time by giving
prior written notice to Leucadia; provided, however, that such resignation shall
not be effective earlier than sixty (60) days after the date of such notice
unless an
7
<PAGE>
earlier effective date is agreed to by Leucadia and a new Trustee shall have
been appointed.
Section 5.2 Upon resignation, death, or removal of a Trustee, a
successor trustee (a "Successor Trustee") shall be appointed by Leucadia on
behalf of the Beneficiaries, and the appointment of the Successor Trustee shall
be binding upon all Beneficiaries then holding beneficial interests in the
Trust.
Section 5.3 Any Successor Trustee shall execute and deliver to the
Beneficiaries and to the predecessor Trustee an instrument accepting such
appointment, the terms and conditions of which shall be the same as those
contained in this Agreement, and thereupon such Successor Trustee, without
further act, shall be vested with all the estates, properties, rights, powers,
duties and trusts of the predecessor Trustee in the Trust with like effect as if
originally named as Trustee herein; but nevertheless, upon the written request
of such Successor Trustee, the predecessor Trustee shall (i) execute,
acknowledge and deliver such instruments of conveyance and further assurances
and do such other things as may reasonably be required for more fully and
certainly vesting and confirming unto said Successor Trustee all the right,
title and interest of the predecessor Trustee in and to the Trust Property; (ii)
duly assign, transfer, deliver, account for and pay over to such Successor
Trustee any property or money then held by such predecessor Trustee upon the
trusts herein expressed; and (iii) deliver to such Successor Trustee any and all
records, or copies thereof, in respect of the Trust which it may have.
ARTICLE 6
TRUSTEE'S COMPENSATION
Section 6.1 The Trustee hereby waives any commission or fees for the
performance of its obligations as Trustee under this Agreement.
ARTICLE 7
DISTRIBUTIONS TO BENEFICIARIES
Section 7.1 All Trust Property shall be distributed by the Trustee
to the Beneficiaries, as beneficiaries under the Trust solely in accordance with
Section 7.2, on one or more distribution dates as determined by the Trustee.
8
<PAGE>
Section 7.2 The Trustee shall not be obligated to make any
distributions of Trust Property prior to July 5, 1999. As promptly as
practicable following the acquisition by the Trust of the Additional HomeFed
Stock under the Purchase Agreement, the Trust shall distribute the HomeFed Stock
Interest (and any other shares of HomeFed Stock that may then be Trust Property)
and any cash then held as Trust Property to the Beneficiaries; provided,
however, that the distribution of such shares of HomeFed Stock from the Trust to
the Beneficiaries shall be pursuant to an effective registration statement under
the Securities Act, unless the Trustee shall have received an opinion of counsel
to the effect that no such registration statement is required for such
distribution. In the event that the shares of Additional HomeFed Stock are not
purchased by July 31, 1999 and the Purchase Agreement is then terminated, the
Trustee as promptly as practicable shall distribute to the Beneficiaries the
Trust Property then owned by the Trust; provided, however, that the distribution
of shares of the Owned HomeFed Stock from the Trust to the Beneficiaries shall
be pursuant to an effective registration statement under the Securities Act,
unless the Trustee shall have received an opinion of counsel to the effect that
no such registration statement is required for such distribution. No
certificates representing fractional shares of HomeFed Stock will be distributed
by the Trustee to the Beneficiaries. In lieu of any fractional shares of HomeFed
Stock, (the "Fractional Shares"), the Trustee shall, on behalf of all holders of
such Fractional Shares, (i) determine the number of shares of HomeFed Stock that
would otherwise have been distributed as Fractional Shares, (ii) sell such
shares at the then prevailing market price, and (iii) determine the portion, if
any, of the net proceeds of such sale to which each holder of a Fractional Share
interest is entitled, by multiplying the amount of the aggregate net proceeds of
the sale of the Factional Shares, by a fraction, the numerator of which is the
amount of the Fractional Share to which such holder of a Fractional Share is
entitled, and the denominator of which is the aggregate amount of Fractional
Shares to which all holders of Fractional Shares are entitled. As soon as
practicable after the determination of the amount of cash, if any, to be paid to
holders of Fractional Shares in lieu of such Fractional Shares, the Trustee
shall distribute such amounts, without interest, to such holders. Any cash
received on distribution in respect of, or proceeds from the sale of, the
HomeFed Stock Interest (or any other shares of HomeFed Stock that may then be
Trust Property) shall be distributed by the Trustee as promptly as practicable.
9
<PAGE>
ARTICLE 8
LIMITATION ON BENEFICIARY'S ASSIGNMENT
OF RIGHT TO DISTRIBUTION
Section 8.1 Beneficial interests in the Trust, and any other
interests therein, (i) cannot be assigned, conveyed, hypothecated, pledged or
otherwise transferred, voluntarily or involuntarily, directly or indirectly,
except by will or under the laws of descent and distribution; (ii) shall not be
evidenced by a certificate or other instrument; (iii) shall not possess any
voting rights; (iv) shall not be entitled to receive any distributions, except
pursuant to Article 7; and (v) shall not represent any equity interest in
HomeFed Corporation.
ARTICLE 9
TERMINATION OF THE TRUST
Section 9.1 Other than the obligations of the Trustee under Section
3.5 hereof, this Agreement and the Trust created hereby shall terminate and this
Agreement shall be of no further force or effect on the earlier to occur of (i)
the date on which all of the Trust Property has been distributed to the
Beneficiaries in accordance with Article 7 or (ii) December 31, 2001.
Section 9.2 No transfer, by operation of law or death, of the right,
title and interest of any Beneficiary in and to the Trust Property or hereunder
shall operate to terminate this Agreement or the Trust hereunder or entitle any
successor or transferee of such Beneficiary to an accounting (except to the
extent generally required under Section 3.7) or to the transfer to it of legal
title to any part of the Trust Property.
ARTICLE 10
JURISDICTION
Section 10.1 Any provision of this Agreement which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
10
<PAGE>
ARTICLE 11
MISCELLANEOUS
Section 11.1 As used in this Agreement (including the recitals
herein), capitalized terms shall have the meanings assigned to them (such
meanings to be equally applicable to both the singular and plural forms of the
terms defined or to the feminine, masculine or neuter gender, as the case may
be), unless the context otherwise requires.
Section 11.2 This Agreement is not intended to create and shall not
be interpreted as creating an association, corporation, partnership or joint
venture of any kind; it is intended to create an investment trust within the
meaning of Treasury Regulation Section 301.7701-4(c)(i), to be governed and
construed in all respects as a trust without transferable interests; any
ambiguities in this Agreement shall be resolved, and any income tax reporting
obligations of the Trust and the Beneficiaries shall be fulfilled, in a manner
consistent with such treatment.
Section 11.3 Leucadia shall not have or incur any obligation or
liability to any other person on account of any act or failure to act by the
Trustee or any other person.
Section 11.4 The Trustee shall not assume any liability or incur any
obligation or liability to any other person in connection with the transfer by
Leucadia to the Trustee of the Trust Property, and no delegation of duty of
performance to the Trustee or assumption of liabilities of Leucadia by the
Trustee is intended hereby except as expressly set forth in Section 1.1 of this
Trust Agreement.
Section 11.5 As promptly as practicable after the date hereof,
Leucadia shall certify to the Trustee the names of the Beneficiaries and the
amount of beneficial interests in the Trust held by each such Beneficiary.
Leucadia shall indemnify, defend and hold the Trustee harmless against claims of
any nature whatsoever with respect to Leucadia's determination of a
Beneficiary's share of beneficial interests in the Trust.
Section 11.6 This Trust Agreement may be amended from time to time
by the Trustee and Leucadia, without the consent of any holders of beneficial
interests in the Trust, but only (i) to cure any ambiguity, correct or
supplement any provision herein which may be inconsistent with any other
provision herein, or to
11
<PAGE>
make any other provisions with respect to matters or questions arising under
this Trust Agreement not inconsistent with the other provisions of this Trust
Agreement, or (ii) to modify, eliminate or add to any provisions of this Trust
Agreement to such extent as shall be necessary to ensure that the Trust will be
classified for United States federal income tax purposes as a grantor trust at
all times or to ensure that the Trust will not be required to register as an
"investment company" under the 1940 Act, or be classified as other than a
grantor trust for United States federal income tax purposes; provided, however,
that in the case of clause (i), such action shall not adversely affect in any
material respect the interests of any holder of a beneficial interest in the
Trust. In all other cases, this Trust Agreement may be amended with the approval
of holders of a majority of beneficial interests in the Trust, except with
respect to changes to the definition of Trust Property, which shall require a
favorable vote of all Beneficiaries. Any amendments to this Trust Agreement
shall become effective upon execution by the Trustee and Leucadia and notice
thereof shall be given to the Beneficiaries.
Section 11.7 Except as provided herein, the obligations, duties
and/or rights of the Trustee under this Agreement shall not be assignable,
voluntarily, involuntarily or by operation of law, and any such assignment shall
be void. All covenants and agreements contained herein shall be binding upon and
are personal to the Trustee and shall inure to the benefit of the Trustee and
any Successor Trustee in the same manner.
Section 11.8 This Agreement, together with the related instruments
expressly referred to herein, constitutes the entire agreement of the parties,
and all such agreements shall be construed as integrated and complimentary of
each other.
Section 11.9 Article headings in this Agreement are included for
convenience of reference only and shall not constitute a part of this Agreement
for any other purpose.
SECTION 11.10 This Agreement, shall be construed in accordance with
and governed by the laws of the State of New York.
SECTION 11.11 This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, and all of which
together shall constitute one and the same instrument. This Agreement shall
become effective immediately upon the exchange of executed signature pages,
which may be by facsimile.
12
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed and delivered as of the first date hereinabove written.
Leucadia National Corporation
By: /s/ Barbara L. Lowenthal
------------------------------------
Title: Vice President
Trustee:
/s/ Joseph A. Orlando
-----------------------------------------
Joseph A. Orlando
