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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (Fee Required) For the fiscal year ended December 31, 1998
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required) For the transition period from
___________ to ___________
Commission file number: 1-10153
HOMEFED CORPORATION
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(Exact Name of Registrant as Specified in its Charter)
DELAWARE 33-0304982
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1903 WRIGHT PLACE
SUITE 220
CARLSBAD, CALIFORNIA 92008
(760) 918-8200
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(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
Securities registered pursuant to Section 12(b) of the Act: NONE.
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
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(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [x].
Based on the average bid and asked prices of the Registrant's Common Stock as
published by the OTC Bulletin Board Service as of March 24, 1999, the aggregate
market value of the Registrant's Common Stock held by non-affiliates was
approximately $367,322 on that date.
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [X] No [ ]
As of March 26, 1999, there were 10,000,000 outstanding shares of the
Registrant's Common Stock, par value $.01 per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive proxy statement, to be filed with the
Commission for use in connection with the 1999 Annual Meeting of Stockholders
are incorporated by reference into Part III of this Form 10-K.
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NYFS04...:\30\76830\0194\1901\FRM2119B.33L
<PAGE>
PART I
Item 1. Business.
THE COMPANY
INTRODUCTION
HomeFed Corporation ("HomeFed" or the "Company") was incorporated in
Delaware in 1988. The Company is engaged, directly and through subsidiaries, in
the investment in and development of residential real estate projects in the
State of California. The principal executive office of the Company is located at
1903 Wright Place, Suite 220, Carlsbad, California 92008.
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.
In August and October 1998, in connection with the execution of a
Development Management Agreement and the restructuring of the Convertible Note
(each as described in more detail below), 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.
CURRENT DEVELOPMENT PROJECTS
The Company has been involved in the development of California real estate
since its inception. After emerging from bankruptcy, the Company was engaged
primarily in selling developed and undeveloped lots in bulk to homebuilders in
two development projects: Paradise Valley, which is described below, and
Silverwood, a 135 acre development project located in the Granite Bay area of
greater Sacramento, California. Substantially all of the Company's 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. The Company originally owned
approximately one-third of this project, with the balance of the project being
owned by three unrelated development companies. The Company's holdings
originally included 84 acres planned for four detached single-family residential
sites, three clustered housing development sites and a school site. The Company
built and sold 36 residential homes on two of the detached single-family
residential sites from 1995 to 1997. For the remaining single family residential
sites, the Company changed its
<PAGE>
marketing strategy, discontinued its home building program and focused on
selling both improved and unimproved lots in bulk.
From 1996 to 1998, the Company sold 205 improved lots on the detached
single family residential sites at the Paradise Valley project for aggregate
cash consideration of approximately $8,927,000. Of such amount, sales of 61 lots
closed in 1998 for aggregate consideration of $2,719,000, less closing costs. On
February 23, 1999, the Company 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. The Company has continuing obligations at
Paradise Valley with respect to certain warranty liabilities and the completion
of a recreational facility that will become the property of the Paradise Valley
Homeowners' Association.
The Company continues to own the clustered housing development and school
site at the Paradise Valley project. The Company is discussing with governmental
authorities the possibility of changing the project's entitlements to permit
development for uses other than clustered housing. Once the Company concludes
these discussions, it will determine how best to market these sites for sale,
either as clustered housing, or as permitted under any amended entitlements that
may be received. 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 December 31, 1998 of approximately $4,636,000.
MASTER-PLANNED COMMUNITIES
In 1998, the Company entered into the largest development projects in
which it has been involved since emerging from bankruptcy which are its first
projects involving development of master-planned communities: San Elijo Hills,
for which the Company is the development manager, and a portion of Otay Ranch,
in which the Company has an equity interest and for which it is the development
manager.
San Elijo Hills
In August 1998, the Company entered into a Development Management
Agreement (the "Development Agreement") with San Elijo Hills Development
Company, LLC, an indirect subsidiary of Leucadia that owns certain real property
located in the City of San Marcos, in San Diego County, California. Pursuant to
the Development Agreement, this project, which is known as San Elijo Hills, will
be a master-planned community of approximately 3,400 homes and apartments as
well as commercial properties expected to be completed during 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. The Company is the development
manager of this project with responsibility for the overall management of the
project, including, among other things, preserving existing entitlements and
obtaining any additional entitlements required for the project, arranging
financing for the project, coordinating marketing and sales activity, and acting
as the construction manager. The Development Agreement provides that the Company
will participate in the net profits of the project (as determined under the
Development Agreement), and that the Company will receive fees for the project
management and marketing services it is to provide, based on the revenues of the
project. For additional information, see Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations," of this Report.
The first six neighborhoods, consisting of approximately 735 residential
sites, have been presented for sale. The Company has entered into agreements
with different builders to sell four of these neighborhoods, encompassing
approximately 470 lots, for aggregate consideration of approximately $71,500,000
subject to the completion of satisfactory due diligence by the prospective
buyers. The prospective buyers have deposited an aggregate of $2,575,000 into
escrow, $2,375,000 of which is non-refundable assuming the lots are delivered as
2
<PAGE>
agreed to. While the Company expects that the sale of some of these
neighborhoods will close during 1999, no assurances can be given that any of
these sales will actually occur.
Otay Ranch
On October 14, 1998, the Company and Leucadia formed Otay Land Company,
LLC (the "Otay Land Company") for the purpose of purchasing 4,800 acres of land
located within the 22,900 acre Otay Ranch planning area south of San Diego,
California. Otay Land Company acquired this land for approximately $19,500,000.
The Company contributed $10,000,000 as capital and Leucadia contributed
$10,000,000 as a preferred capital interest; the Company will act as development
manager of this project.
The General Development Plan for the 22,900 acre project, which has been
approved by the City of Chula Vista and the County of San Diego, includes
approximately 27,000 home sites, a golf-oriented resort and residential
community, commercial retail centers, a 700 acre proposed university site and a
network of infrastructure including roads and highways, a rail transportation
system, park systems and schools. Of the 4,800 acres owned by the Otay Land
Company, 3,600 acres of non-contiguous land are zoned as various qualities of
"open space mitigation land." A market for this type of land is created by a
variety of needs including the requirement that 1.2 acres of such land be set
aside for each acre developed. The Otay Land Company continues to evaluate how
best to maximize the value of this investment.
Master-planned communities are long-term projects generally requiring
substantial investments of time and capital resources. These communities
generally require significant amounts of time from initial planning and
entitlement proceedings to the closing of the first sale of a finished homesite
or a completed home.
For each 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 such entitlements, a developer
generally does not have any "vested rights" to develop a project. In addition,
as a precondition to receipt of development or building related permits,
master-planned communities 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 existing communities, including
such things as 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 such as 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 its
master-planned communities, the Company will coordinate home construction with
commercial development and installation of parks and recreational facilities. In
this process, the Company 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 the policy of the Company to retain control over the
location and character of non-residential properties, such as shopping centers
and recreational facilities, within its master-planned communities. The Company
will develop its communities in
3
<PAGE>
phases to allow the Company flexibility to sell finished lots to suit market
conditions and to enable it to create stable and attractive neighborhoods.
Consequently, at any particular time, the various phases of a project will be in
different stages of land development and construction.
Competition
Real estate development is a highly competitive business. There are
numerous residential real estate developers and development projects operating
in the same geographic area in which the Company operates. Competition among
real estate developers and development projects is determined by the location of
the real estate, the market appeal of the development master plan, and the
developer's ability to build, market and deliver project segments on a timely
basis. Residential developers sell to homebuilders, who compete based on
location, price, market segmentation, product design and reputation.
Government Regulation
The residential real estate development industry is subject to increasing
environmental, building, zoning and real estate regulations that are imposed by
various federal, state and local authorities. In developing a community, the
Company must obtain the approval of numerous governmental agencies regarding
such matters as permitted land uses, housing density, the installation of
utility services (such as water, sewer, gas, electric, telephone and cable
television) and the dedication of acreage for open space, parks, schools and
other community purposes. Regulations affect homebuilding by specifying, among
other things, the type and quality of building material that must be used,
certain aspects of land use and building design and the manner in which
homebuilders may conduct their sales, operations, and overall relationships with
potential home buyers. Furthermore, changes in prevailing local circumstances or
applicable laws may require additional approvals, or modifications of approvals
previously obtained.
Timing of the initiation and completion of development projects depends
upon receipt of necessary authorizations and approvals. Delays could adversely
affect the Company's ability to complete its projects, significantly increase
the costs of doing so or drive potential customers to purchase competitors'
products.
Environmental Compliance
Environmental laws may cause the Company to incur substantial compliance,
mitigation and other costs, may restrict or prohibit development in certain
areas and may delay completion of the Company's development projects. To date,
environmental laws have not had a material adverse effect on the Company, and
management is not currently aware of any environmental compliance matters that
would have a material adverse effect on the Company. Delays arising from
compliance with environmental laws and regulations could adversely affect the
Company's ability to complete its projects, significantly increase the costs of
doing so or drive potential customers to purchase competitors' products.
Administrative Services; Employees
Certain of the Company's administrative services and managerial support
are provided to the Company by LFC pursuant to an administrative services
agreement. Pursuant to this agreement, LFC provides the services of Paul J.
Borden, the Company's President, and Corinne A. Maki, the Company's Treasurer
and Secretary. Mr. Borden and Ms. Maki each are officers of LFC and Leucadia.
Administrative fees paid to LFC in 1998 aggregated $138,000. The current
administrative services agreement extends through February 28, 2002 and provides
for compensation (payable monthly) at an annual rate of $296,101 through
February 29,
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<PAGE>
2000. The agreement provides that the administrative fee payable to LFC for
subsequent annual periods commencing March 1 of a year shall be negotiated in
good faith by the Company and LFC.
Item 2. Properties.
See Item 1 - "Business -- Current Development Projects" and "-- Master
Planned Communities" for a description of the Company's real estate development
projects.
The Company's executive offices are located at 1903 Wright Place, Suite
220, Carlsbad, California 92008 in an office building occupied and leased by a
subsidiary of Leucadia.
Item 3. Legal Proceedings.
The Company is not a party to legal proceedings other than ordinary,
routine litigation, incidental to its business or not material to the Company's
consolidated financial position.
Item 10. Executive Officers of the Registrant.
As of March 24, 1999, the executive officers of the Company, their ages,
the positions held by them and the periods during which they have served in such
positions are as follows:
Name Age Position with the Company Office Held Since
---- --- ------------------------- -----------------
Paul J. Borden 50 President 1998
Corinne A. Maki 42 Treasurer 1995
and Secretary
Curt R. Noland 42 Vice President 1998
The officers serve at the pleasure of the Board of Directors of the
Company.
The recent business experience of the Company's executive officers is
summarized as follows:
Paul J. Borden. Mr. Borden has served as a Director and President of the
Company since May 1998. Mr. Borden has been a Vice President of Leucadia since
August 8, 1988, responsible for overseeing many of Leucadia's real estate
investments. Mr. Borden has also served as a Vice President of LFC.
Corinne A. Maki. Ms. Maki, a certified public accountant, has served as
Treasurer of the Company since February 1995. Ms. Maki has also served as
Secretary of the Company since February 1998 and prior thereto had served as an
Assistant Secretary of the Company since August 1995. Ms. Maki has also been a
Vice President of LFC, holding the offices of Controller, Assistant Secretary
and Treasurer, since October 1992. Ms. Maki has been employed by Leucadia since
December 1991.
5
<PAGE>
Curt R. Noland. Mr. Noland has served as Vice President of the Company
since October 1998. He spent the last 19 years in the land development industry
in San Diego County, as a design consultant, merchant builder, as well as master
developer. Immediately prior to joining the Company, and since November 1997, he
was Director of Development at San Elijo Hills. Prior to his employment by San
Elijo Hills, Mr. Noland spent eight years on the development team for Aviara, a
1,000 acre master-planned resort community in Carlsbad, California. Mr. Noland
has degrees in civil engineering (BSCE) and business administration (MBA) from
San Diego State University. He also holds licenses as a Civil Engineer and Real
Estate Broker.
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters.
The following table sets forth certain information concerning the market
price of the Company's Common Stock for each quarterly period within the two
most recent fiscal years.
High Low
---- ---
Year ended December 31, 1997
First Quarter $ .50 $ .03125
Second Quarter .375 .0625
Third Quarter .375 .0625
Fourth Quarter .375 .0625
Year ended December 31, 1998
First Quarter $ .3125 $ .0625
Second Quarter .3125 .03125
Third Quarter .3125 .01
Fourth Quarter .4375 .03125
The Company's Common Stock is traded in the over-the-counter market. The
Company's Common Stock is not listed on any stock exchange, and price
information for the Common Stock is not regularly quoted on any automated
quotation system. The prices above are based on bid quotations, as published by
the National Association of Securities Dealers OTC Bulletin Board Service, and
represent interdealer prices without retail mark-up, mark-down or commission,
and may not necessarily represent actual transactions. On March 24, 1999, the
bid price for the Company's Common Stock, was $.0625 per share. As of this date,
there were approximately 10,400 stockholders of record. The Company did not
declare dividends on its Common Stock during 1997 or 1998 and it does not
anticipate that it will pay dividends for the foreseeable future.
The Company's Common Stock does not currently meet the minimum
requirements for listing on a national securities exchange or inclusion in the
Nasdaq Stock Market. If the Company's Common Stock becomes eligible to be listed
or included in the Nasdaq Stock Market, the Company will consider its
alternatives with respect to the trading market for the Company's Common Stock.
The transfer agent for the Company's Common Stock is American Stock
Transfer & Trust Company, 40 Wall Street, New York, New York 10005.
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Item 6. Selected Financial Data.
The following selected financial data have been summarized from the
Company's consolidated financial statements and are qualified in their entirety
by reference to, and should be read in conjunction with, such consolidated
financial statements and "Management's Discussion and Analysis of Financial
Condition and Results of Operations," contained in Item 7 of this Report.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
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1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
SELECTED INCOME STATEMENT DATA:
Sales of residential and commercial properties $ 5,752 $ 4,011 $ 8,988 $ 9,422 $ 4,484
Gross profit (loss) 38 (37) (464) 426 66
Interest expense 2,828 2,997 3,063 1,458 --
Loss from operations (4,545) (3,864) (6,424) (2,435) (3,020)
Reorganization items-expense - - - (1,924) (1,424)
Loss before extraordinary item (4,273) (3,577) (6,297) (4,161) (4,294)
Extraordinary item:
Extinguishment of debt - bankruptcy - - - 108,881 -
Net earnings (loss) (4,273) (3,577) (6,297) 104,720 (4,294)
Per share:
Basic earnings (loss) per common share:
Loss before extraordinary item $ (0.43) $ (0.36) $ (0.63) $ (0.42) $ (0.43)
Extraordinary item - - - 10.89 -
-------- --------- --------- --------- -------
Net earnings (loss) $ (0.43) $ (0.36) $ (0.63) $ 10.47 $ (0.43)
======== ========= ========= ========= =======
Diluted earnings (loss) per common share:
Loss before extraordinary item $ (0.43) $ (0.36) $ (0.63) $ (0.09) $ (0.43)
Extraordinary item - - - 3.35 -
-------- --------- --------- --------- -------
Net earnings (loss) $ (0.43) $ (0.36) $ (0.63) $ 3.26 $ (0.43)
======== ========= ========= ========= =======
AT DECEMBER 31,
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1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In thousands, except per share amounts)
SELECTED BALANCE SHEET DATA:
Land and real estate held for development $ 4,636 $ 9,652 $ 13,528 $ 22,069 $ 21,139
Total assets 19,251 15,457 17,091 26,851 23,387
Notes payable to Leucadia Financial Corporation 19,736 26,085 23,877 26,996 1,199
Other notes payable - - - 126 173
Stockholders' deficit (7,997) (10,739) (7,162) (865) (106,845)
Shares outstanding 10,000 10,000 10,000 10,000 10,000
Book value per common share $ (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.
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Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The purpose of this section is to discuss and analyze the Company's
consolidated financial condition, liquidity and capital resources and results of
operations. This analysis should be read in conjunction with the consolidated
financial statements and related notes which appear elsewhere in this report.
LIQUIDITY AND CAPITAL RESOURCES
For the years ended December 31, 1998, 1997 and 1996, net cash was
provided by operating activities, principally from sales of real estate. The
Company's principal sources of funds are dividends or borrowings from its
subsidiaries, any fee income earned from the San Elijo Hills project and amounts
receivable and advanced pursuant to the stock purchase agreements described
herein. The Company is dependent upon the cash flow, if any, from the sale of
real estate and management fees in order to pay its expenses, including debt
service payments.
The Company expects that its cash on hand, together with cash generated
from lot sales and the remaining purchase price due pursuant to the August stock
purchase agreement described below, will be sufficient to meet its cash flow
needs for the foreseeable future. However, the Company's ability to fund the
cost of providing services required under the Development Agreement after 1999
will depend significantly upon the receipt of fees under the Development
Agreement as described below. If at any time in the future the Company's cash
flow is insufficient to meet its then current cash requirements, the Company
could sell real estate projects held for development or seek to borrow funds
from an unaffiliated party. Any additional financing from an unaffiliated party
cannot be collateralized by any of the Company's assets without LFC's consent.
Accordingly, the Company may be unable to obtain financing from sources other
than LFC.
In 1998, in connection with the execution of the Development Agreement and
the restructuring of its Convertible Note and related loan agreement with LFC,
the Company entered into agreements to sell additional Common Stock to Leucadia.
In August 1998, the Company entered into the Development Agreement with a
subsidiary of Leucadia. Pursuant to the Development Agreement, the Company will
act as development manager of the San Elijo Hills project, a master-planned
community of approximately 3,400 homes expected to be completed over the next
ten years. As development manager, the Company 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 the Company will receive certain fees in connection with
the project. These fees consist of marketing and management service fees, are
based on a fixed percentage of gross revenues received in respect of the project
and are expected to cover the Company's cost of providing these services. In
addition, the Development Agreement provides for payment of a success fee under
certain circumstances to the Company based on the net cash flow from the project
(as determined in accordance with the Development Agreement), subject to a
maximum success fee; the timing of the payment of any success fee prior to the
conclusion of the project will be at the discretion of the project owner.
In order to determine net cash flow for purposes of calculating the
success fee, all cash expenditures of any nature whatsoever, including land
development costs, current period operating costs, indebtedness either
collateralized by the project (approximately $35,840,000 at December 31, 1998)
or owed by the project's owner to Leucadia (approximately $33,104,000 at
December 31, 1998) (collectively, "Indebtedness") will be deducted from total
revenues received from the project. The Company is entitled to receive payments
out of net cash flow, up to the aggregate amount of the Indebtedness, with the
balance of the net cash flow (if any) to be paid equally to the Company and the
project owner. There can be no assurance that the Company will receive any
8
<PAGE>
success fee for this project. The Company believes that any success fee that it
may receive will be all of the net income the Company may earn as a result of
its participation in the San Elijo Hills project pursuant to the Development
Agreement.
As of August 14, 1998, the Company and LFC entered into an Amended and
Restated Loan Agreement, pursuant to which the original Convertible Note held by
LFC and the related loan agreement were restructured. The restructured note,
dated August 14, 1998 (the "Restructured Note"), is in the principal amount of
approximately $26,462,000 (inclusive of additions to principal resulting from
accrued and unpaid interest on the Convertible Note 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 date of maturity. 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.
In August and October 1998, the Company entered into two 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 that the Company expects to be satisfied. 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 then outstanding. The Company has been advised that,
as promptly as practicable following the purchase of Common Stock under the
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 Leucadia Trust. After giving effect to the stock purchases by the
Leucadia Trust, the 5,882,014 shares of Common Stock held by the current
stockholders of the Company (excluding the Leucadia Trust) will represent, in
the aggregate, approximately 10.4% of the Common Stock to be outstanding. After
the distribution of the Common Stock by the Leucadia Trust, Joseph S. Steinberg,
a director of the Company and a director and President of Leucadia, and Ian M.
Cumming, Chairman of the Board of Directors of Leucadia, will each beneficially
own approximately 12.7% and 13.9%, respectively, of the Common Stock to be
outstanding.
In 1998 and 1997, the Company entered into agreements pursuant to which it
sold 81 residential lots at the Paradise Valley project for $3,611,000,
($2,719,000 in 1998), less closing costs. In the first quarter of 1999, the
Company entered into an agreement pursuant to which it sold the remaining 75
residential lots at the Paradise Valley project for $2,250,000, less closing
costs. The Company has certain continuing obligations with respect to this
project, including the obligation to construct a recreation center. The Company
estimates that construction of the recreation center for the Paradise Valley
Community will be completed at a cost of approximately $860,000. This obligation
is collateralized by a $1 million collateralized letter of credit. The Company
anticipates construction of the recreation center will begin in the second
quarter of 1999.
In connection with an indemnity agreement to a third party surety, a
subsidiary of the Company is required to maintain either a minimum net worth of
$5,000,000 and a minimum cash balance of $400,000 or provide an irrevocable
letter of credit to such third party. Based upon current estimates, the amount
of the letter of credit required to satisfy this obligation would be
approximately $460,000. The Company has not
9
<PAGE>
elected to deliver this letter of credit, although it may choose to do so in the
future if it determines that the minimum net worth requirement restricts its
operating flexibility.
On February 27, 1998, the Company purchased 19 lots at the Silverwood
project from LFC for a purchase price of $500,000. On July 31, 1998, the Company
sold its entire 97 lot interest in the Silverwood project to Southfork
Partnership ("Southfork") for $3,033,000, less closing costs.
As of October 14, 1998, the Company and Leucadia formed Otay Land Company,
LLC ("Otay Land Company"). The Company invested $10,000,000 as capital and
Leucadia invested $10,000,000 as a preferred capital interest. The Company will
act as 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. 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.
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.
The Company has net operating loss carryforwards ("NOLs") available for
federal income tax purposes of $266,245,000 and available NOLs for state income
tax purposes of $32,305,000 as of December 31, 1998. If the Company is able to
generate taxable income in the future, its NOLs could substantially reduce, but
not eliminate, federal and state income tax payments that would otherwise be
due.
RESULTS OF OPERATIONS
Sales of residential properties increased in 1998 as compared to 1997 due
to the sale of 97 lots in the Silverwood project in addition to the sale of 61
lots at 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 (new and trade) during 1996.
Land and real estate held for development is carried at the lower of cost
or fair value less costs to sell. The provision for losses for the years ended
December 31, 1998, 1997 and 1996 reflect the Company's estimates to reduce the
carrying value of real estate investments to fair value less costs to sell. 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 prior provisions for losses.
Interest expense for all years presented primarily reflects the interest
due on the Restructured Note and Convertible Note to LFC, 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
the Company. Interest of $385,000 was also paid to LFC on a construction loan in
1996.
10
<PAGE>
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 principally relates to state
franchise taxes. The Company has not recognized any income tax benefit for its
operating losses in all years presented due to the uncertainty of sufficient
future taxable income which is required in order to recognize such tax benefits.
YEAR 2000
During 1998, the Company conducted a review of its computerized systems to
determine how its systems would be affected by the Year 2000 issues.
Additionally, the Company is assessing all material third parties with which the
Company has material relationships to determine their compliance with Year 2000
issues. The Company is seeking confirmation that all such third parties are or
will be Year 2000 compliant and expects such inquiry to be completed by the
fourth quarter of 1999.
To date the Company has not incurred any material expenses in its Year
2000 compliance efforts. No additional significant costs are anticipated and no
other information technology projects have been deferred as a result of Year
2000 issues.
With respect to outside parties that could affect the Company's business
as a result of Year 2000 problems, the Company believes that the most likely
problems would arise because of isolated instances of shortages of supplies.
However, the Company's suppliers are major businesses which it believes will be
Year 2000 compliant. The Company has not developed a formal contingency plan but
believes there are adequate alternative suppliers which the Company could use in
the event that one of its suppliers was unable to provide supplies needed in its
operations. The Company believes that in the most reasonably likely worst case,
it would experience only a short-term problem causing a temporary disruption of
business.
INFLATION
The Company, as well as the real estate development and homebuilding
industry in general, may be adversely affected during periods of low or high
inflation, primarily because of reduced rates of savings by consumers or higher
land and construction costs, respectively. Low inflation could adversely affect
consumer demand by limiting growth of savings for down payments, ultimately
affecting demand for real estate and the Company's revenues. In addition, higher
mortgage interest rates may significantly affect the affordability of permanent
mortgage financing to prospective purchasers. High inflation also increases the
Company's interest costs and costs of labor and materials. The Company would
attempt to pass through to its customers any increases in its costs through
increased selling prices. To date, high or low rates of inflation have not had a
material adverse effect on the Company's results of operations. However, there
is no assurance that high or low rates of inflation will not have a material
adverse impact on the Company's future results of operation.
11
<PAGE>
INTEREST RATES
The Company's operations are interest rate sensitive. Overall housing
demand is adversely affected by increases in interest costs. If mortgage
interest rates increase significantly, this may negatively impact the ability of
a home buyer to secure adequate financing. Such results of higher interest rates
could adversely affect the Company's revenues, gross margins and net income.
CAUTIONARY STATEMENT FOR FORWARD-LOOKING INFORMATION
Statements included in this Report may contain forward-looking statements.
Such forward-looking statements are made pursuant to the safe-harbor provisions
of the Private Securities Litigation Reform Act of 1995. Such statements may
relate, but are not limited, to projections of revenues, income or loss, capital
expenditures, fluctuations in insurance reserves, plans for growth and future
operations, including Year 2000 compatibility, competition and regulation as
well as assumptions relating to the foregoing. Forward-looking statements are
inherently subject to risks and uncertainties, many of which cannot be predicted
or quantified. When used in this Report, the words "estimates", "expects",
"anticipates", "believes", "plans", "intends" and variations of such words and
similar expressions are intended to identify forward-looking statements that
involve risks and uncertainties. Future events and actual results could differ
materially from those set forth in, contemplated by or underlying the
forward-looking statements. The factors that could cause actual results to
differ materially from those suggested by any such statements include, but are
not limited to, those discussed or identified from time to time in the Company's
public filings, including general economic and market conditions, changes in
domestic laws, regulations and taxes, changes in competition and pricing
environments, regional or general changes in asset valuation, the occurrence of
significant natural disasters, the inability to reinsure certain risks
economically, the adequacy of loss reserves, prevailing interest rate levels,
the difficulty in identifying hardware and software that may not be Year 2000
compliant, the lack of success of third parties to adequately address the year
2000 issue, and changes in the composition of the Company's assets and
liabilities through acquisitions or divestitures. Undue reliance should not be
placed on these forward-looking statements, which are applicable only as of the
date hereof. The Company undertakes no obligation to revise or update these
forward-looking statements to reflect events or circumstances that arise after
the date of this Report or to reflect the occurrence of unanticipated events.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.
The Company does not have material market risk exposures.
Item 8. Financial Statements and Supplementary Data.
Financial Statements and supplementary data required by this Item 8 are
set forth at the pages indicated in Item 14(a) below.
Item 9. Disagreements on Accounting and Financial Disclosure.
Not applicable.
12
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information to be included under the caption "Nominees for Election as
Directors" in the Company's definitive proxy statement to be filed with the
Commission pursuant to Regulation 14A of the 1934 Act in connection with the
1999 annual meeting of shareholders of the Company (the "Proxy Statement") is
incorporated herein by reference. In addition, reference is made to Item 10 in
Part I of this Report.
Item 11. Executive Compensation.
The information to be included under the caption "Executive Compensation"
in the Proxy Statement is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information to be included under the caption "Present Beneficial
Ownership of Common Shares" in the Proxy Statement is incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions.
The information to be included under the caption "Certain Relationships
and Related Transactions" in the Proxy Statement is incorporated herein by
reference.
13
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a)(1) Financial Statements
Report of Independent Accountants F-1
Consolidated Balance Sheets at F-2
December 31, 1998 and 1997
Consolidated Statements of F-3
Operations for the years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Changes F-4
in Stockholders' Deficit for the
years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash F-5
Flows for the years ended December 31,
1998, 1997 and 1996
Notes to Consolidated Financial Statements F-7
(a)(2) Financial Statement Schedules
Schedules are omitted because they are not required or are not
applicable or the required information is shown in the financial
statements or notes thereto
14
<PAGE>
(b) Reports on Form 8-K.
None.
(c) Exhibits
2.1 Amended Disclosure Statement to the Company's Fourth Amended Plan of
Reorganization Dated July 15, 1994 (incorporated by reference to Exhibit
2.1 to the Company's current report on Form 8-K dated June 14, 1995).
2.2 The Company's Fourth Amended Plan of Reorganization Dated July 15, 1994
(incorporated by reference to Exhibit 2.2 to the Company's current report
on Form 8-K dated June 14, 1995).
2.3 Order Modifying and Confirming the Company's Fourth Amended Plan of
Reorganization Dated July 15, 1994 (incorporated by reference to Exhibit
2.3 to the Company's current report on Form 8-K dated June 14, 1995).
3.1 Restated Certificate of Incorporation, as restated July 3, 1995 of the
Company (incorporated by reference to Exhibit 3.1 to the Company's
quarterly report on Form 10-Q for the quarter ended September 30, 1995).
3.2 By-laws of the Company as amended through November 10, 1995 (incorporated
by reference to Exhibit 3.2 to the Company's quarterly report on Form 10-Q
for the quarter ended September 30, 1995).
10.1 Loan Agreement dated July 3, 1995 between the Company and Leucadia
Financial Corporation and Form of 12% Secured Convertible Note due July 3,
2003 (incorporated by reference to Exhibit 10.2 to the Company's quarterly
report on Form 10-Q for the quarter ended September 30, 1995).
10.2 Paradise Valley Unit 1 First Closing Purchase Agreement and Escrow
Instructions, dated October 3, 1996, between Paradise Valley Communities
No. 1 and The Forecast Group (Registered Trade Name), L.P. (incorporated
by reference to Exhibit 10.1 to the Company's quarterly report on Form
10-Q for the quarter ended September 30, 1996).
10.3 Paradise Valley Unit 2 First Closing Purchase Agreement and Escrow
Instructions, dated October 3, 1996, between Paradise Valley Communities
No. 1 and The Forecast Group (Registered Trade Name), L.P. (incorporated
by reference to Exhibit 10.2 to the Company's quarterly report on Form
10-Q for the quarter ended September 30, 1996).
10.4 Paradise Valley Unit 1 Second Closing Purchase Agreement and Escrow
Instructions, dated October 3, 1996, between Paradise Valley Communities
No. 1 and The Forecast Group (Registered Trade Name), L.P. (incorporated
by reference to Exhibit 10.3 to the Company's quarterly report on Form
10-Q for the quarter ended September 30, 1996).
10.5 Paradise Valley Unit 2 Second Closing Purchase Agreement and Escrow
Instructions, dated October 3, 1996, between Paradise Valley Communities
No. 1 and The Forecast Group (Registered Trade Name), L.P. (incorporated
by reference to Exhibit 10.4 to the Company's quarterly report on Form
10-Q for the quarter ended September 30, 1996).
15
<PAGE>
10.6 Paradise Valley Unit 3 Option to Purchase Real Property and Escrow
Instructions, dated October 3, 1996, between Paradise Valley Communities
No. 1 and The Forecast Group (Registered Trade Name), L.P. (incorporated
by reference to Exhibit 10.5 to the Company's quarterly report on Form
10-Q for the quarter ended September 30, 1996).
10.7 Paradise Valley Unit 4 Option to Purchase Real Property and Escrow
Instructions, dated October 3, 1996, between Paradise Valley Communities
No. 1 and The Forecast Group (Registered Trade Name), L.P. (incorporated
by reference to Exhibit 10.6 to the Company's quarterly report on Form
10-Q for the quarter ended September 30, 1996).
10.8 Real Estate Purchase Agreement and Escrow Instructions between Southfork
Partnership and Northfork Communities (incorporated by reference to
Exhibit 10.1 to the Company's quarterly report on Form 10- Q for the
quarter ended June 30, 1998).
10.9 Amended and Restated Loan Agreement between the Company and Leucadia,
dated as of August 14, 1998 (incorporated by reference to Exhibit 10.2 to
the Company's report on Form 8-K dated August 14, 1998).
10.10 Development Management Agreement between the Company and Provence Hills
Development Company, LLC, dated as of August 14, 1998 (incorporated by
reference to Exhibit 10.3 to the Company's report on Form 8-K dated August
14, 1998).
10.11 Stock Purchase Agreement between the Company and Leucadia, dated as of
August 14, 1998 (incorporated by reference to Exhibit 10.1 to the
Company's report on Form 8-K dated August 14, 1998).
10.12 Amended and Restated Limited Liability Company Agreement of Otay Land
Company, LLC, dated as of October 14, 1998, between the Company and
Leucadia National Corporation (incorporated by reference to Exhibit 10.12
to the Company's report on Form 10-Q for the quarter ended September 30,
1998).
10.13 Stock Purchase Agreement, dated as of October 20, 1998, between the
Company and Leucadia (incorporated by reference to Exhibit 10.1 to the
Company's report on Form 10-Q for the quarter ended September 30, 1998).
10.14 Administrative Services Agreement, dated as of March 1, 1999, between LFC,
the Company, HomeFed Resources Corporation and HomeFed Communities, Inc.
21 Subsidiaries of the Company.
27 Financial Data Schedule.
(d) Financial Statements of Greater than 50% Owned Entity.
Otay Land Company, LLC financial statements as of December 31, 1998 and
for the period from inception (October 14, 1998) to December 31, 1998.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
HOMEFED CORPORATION
Date: March 29, 1999 By /s/ Corinne A. Maki
-------------------------------------
Corinne A. Maki
Secretary and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date: March 29, 1999 By /s/ Timothy Considine
-------------------------------------
Timothy Considine, Chairman of the Board and Director
Date: March 29, 1999 By /s/ Paul J. Borden
-------------------------------------
Paul J. Borden, President and Director
(Principal Executive Officer)
Date: March 29, 1999 By /s/ Corinne A. Maki
-------------------------------------
Corinne A. Maki
Secretary and Treasurer
(Principal Financial and Accounting Officer)
Date: March 29, 1999 By /s/ Patrick D. Bienvenue
-------------------------------------
Patrick D. Bienvenue, Director
Date: March 29, 1999 By /s/ Michael A. Lobatz
-------------------------------------
Michael A. Lobatz, Director
Date: March 29, 1999 By /s/ Joseph S. Steinberg
-------------------------------------
Joseph S. Steinberg, Director
17
<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 $ 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 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 Financial Corporation $ - $ - $ 1,439
Repayments of notes payable to Leucadia Financial 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 - Land and real estate held for
development is carried at the lower of cost or fair value less costs to sell.
The cost of land and real estate held for development includes all expenditures
incurred in connection with the acquisition, development and construction of the
property, including interest and property taxes. Revenue from incidental
operations relating specifically to property under development is treated as a
reduction of capitalized costs. Land costs included in land and real estate held
for development are allocated to lots based on relative fair values prior to
development and are charged to cost of sales at the time of sale.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include short-term,
highly liquid investments that are readily convertible to cash. The majority of
the Company's cash and cash equivalents are held by one financial institution in
Salt Lake City, Utah.
RESTRICTED CASH - Restricted cash consists of amounts reserved for
warranty obligations on homes sold and amounts reserved as collateral relating
to an outstanding standby letter of credit.
INVESTMENTS - Investments consist of liquid mutual fund accounts and are
carried at cost, which approximates market value.
REVENUE RECOGNITION - Revenue from the sale of real estate is recognized
at the time title is conveyed to the buyer at the close of escrow, minimum down
payment requirements are met, the terms of any notes received satisfy continuing
payment requirements, and there are no requirements for continuing involvement
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
A summary of land and real estate held for development 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 in 1996
was $26,000. No interest was capitalized in land and real estate held for
development during 1998 and 1997.
All land and real estate held for development 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
F-8
<PAGE>
HOMEFED CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. NOTES PAYABLE, continued:
assets of the borrower, whether now owned or hereafter acquired. No principal
payments are due under the Restructured Note until its maturity date.
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
F-10
<PAGE>
HOMEFED CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. COMMITMENTS AND CONTINGENCIES, continued:
is included in restricted cash. The letter of credit was issued to guaranty the
partnership's obligation under a property development agreement to construct a
recreation center.
One of the Company's wholly-owned subsidiaries, HomeFed Communities, must
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
F-11
<PAGE>
HOMEFED CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. RELATED PARTY TRANSACTIONS, continued:
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.
(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.
F-12
<PAGE>
HOMEFED CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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>
OTAY LAND COMPANY, LLC
REPORT ON AUDIT OF FINANCIAL STATEMENTS AS OF
DECEMBER 31, 1998 AND FOR THE PERIOD FROM
INCEPTION (OCTOBER 14, 1998) TO DECEMBER 31, 1998
S-1
<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
S-2
<PAGE>
OTAY LAND COMPANY, LLC
BALANCE SHEET
- --------------------------------------------------------------------------------
DECEMBER 31,
1998
----
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
============
S-3
<PAGE>
OTAY LAND COMPANY, LLC
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
PERIOD FROM INCEPTION
(OCTOBER 14, 1998)
TO DECEMBER 31, 1998
--------------------
OPERATING EXPENSES
General and administrative expenses............... $ (10,883)
----------
Loss from operations......................... (10,883)
OTHER INCOME
Interest income................................... 11,019
----------
Net income................................... $ 136
==========
S-4
<PAGE>
OTAY LAND COMPANY, LLC
STATEMENT OF CHANGES IN MEMBERS' CAPITAL
FOR THE PERIOD FROM INCEPTION (OCTOBER 14, 1998) TO DECEMBER 31, 1998
- --------------------------------------------------------------------------------
PREFERRED
CAPITAL CAPITAL TOTAL
------- ------- -----
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
============ ============ ============
S-5
<PAGE>
OTAY LAND COMPANY, LLC
STATEMENT OF CASH FLOWS
- --------------------------------------------------------------------------------
PERIOD FROM INCEPTION
(OCTOBER 14, 1998)
TO DECEMBER 31, 1998
--------------------
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
============
S-6
<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.
S-7
<PAGE>
OTAY LAND COMPANY, LLC
NOTES TO FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies, continued:
Provisions for Losses on Real Estate Investments
Management periodically assesses the recoverability of its real estate
investments by comparing the carrying amount of the investments with their
fair value less costs to sell. The process involved in the determination
of fair value requires estimates as to future events and market
conditions. This estimation process assumes the Company has the ability to
complete development and dispose of its real estate properties in the
ordinary course of business based on management's present plans and
intentions. When management determines that the carrying value of specific
real estate investments should be reduced to properly record these assets
at fair value less costs to sell, the write-down is recorded as a charge
to current period operations.
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.
S-8
<PAGE>
OTAY LAND COMPANY, LLC
NOTES TO FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
2. Members' Capital, continued:
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
the members; however, as long as LNC holds preferred capital, it shall
select the officers of the Company.
S-9
<PAGE>
EXHIBIT INDEX
Exhibit Exemption
Number Description Indication
- ------ ----------- ----------
2.1 Amended Disclosure Statement to the Company's Fourth Amended Plan of
Reorganization Dated July 15, 1994 (incorporated by reference to Exhibit
2.1 to the Company's current report on Form 8-K dated June 14, 1995).
2.2 The Company's Fourth Amended Plan of Reorganization Dated July 15, 1994
(incorporated by reference to Exhibit 2.2 to the Company's current report
on Form 8-K dated June 14, 1995).
2.3 Order Modifying and Confirming the Company's Fourth Amended Plan of
Reorganization Dated July 15, 1994 (incorporated by reference to Exhibit
2.3 to the Company's current report on Form 8-K dated June 14, 1995).
3.1 Restated Certificate of Incorporation, as restated July 3, 1995 of the
Company (incorporated by reference to Exhibit 3.1 to the Company's
quarterly report on Form 10-Q for the quarter ended September 30, 1995).
3.2 By-laws of the Company as amended through November 10, 1995 (incorporated
by reference to Exhibit 3.2 to the Company's quarterly report on Form 10-Q
for the quarter ended September 30, 1995).
10.1 Loan Agreement dated July 3, 1995 between the Company and Leucadia
Financial Corporation and Form of 12% Secured Convertible Note due July 3,
2003 (incorporated by reference to Exhibit 10.2 to the Company's quarterly
report on Form 10-Q for the quarter ended September 30, 1995).
10.2 Paradise Valley Unit 1 First Closing Purchase Agreement and Escrow
Instructions, dated October 3, 1996, between Paradise Valley Communities
No. 1 and The Forecast Group (Registered Trade Name), L.P. (incorporated
by reference to Exhibit 10.1 to the Company's quarterly report on Form
10-Q for the quarter ended September 30, 1996).
10.3 Paradise Valley Unit 2 First Closing Purchase Agreement and Escrow
Instructions, dated October 3, 1996, between Paradise Valley Communities
No. 1 and The Forecast Group (Registered Trade Name), L.P. (incorporated
by reference to Exhibit 10.2 to the Company's quarterly report on Form
10-Q for the quarter ended September 30, 1996).
10.4 Paradise Valley Unit 1 Second Closing Purchase Agreement and Escrow
Instructions, dated October 3, 1996, between Paradise Valley Communities
No. 1 and The Forecast Group (Registered Trade Name), L.P. (incorporated
by reference to Exhibit 10.3 to the Company's quarterly report on Form
10-Q for the quarter ended September 30, 1996).
10.5 Paradise Valley Unit 2 Second Closing Purchase Agreement and Escrow
Instructions, dated October 3, 1996, between Paradise Valley Communities
No. 1 and The Forecast Group (Registered Trade Name), L.P. (incorporated
by reference to Exhibit 10.4 to the Company's quarterly report on Form
10-Q for the quarter ended September 30, 1996).
10.6 Paradise Valley Unit 3 Option to Purchase Real Property and Escrow
Instructions, dated October 3, 1996, between Paradise Valley Communities
No. 1 and The Forecast Group (Registered Trade Name), L.P. (incorporated
by reference to Exhibit 10.5 to the Company's quarterly report on Form
10-Q for the quarter ended September 30, 1996).
E-1
<PAGE>
EXHIBIT INDEX
Exhibit Exemption
Number Description Indication
- ------ ----------- ----------
10.7 Paradise Valley Unit 4 Option to Purchase Real Property and Escrow
Instructions, dated October 3, 1996, between Paradise Valley Communities
No. 1 and The Forecast Group (Registered Trade Name), L.P. (incorporated
by reference to Exhibit 10.6 to the Company's quarterly report on Form
10-Q for the quarter ended September 30, 1996).
10.8 Real Estate Purchase Agreement and Escrow Instructions between Southfork
Partnership and Northfork Communities (incorporated by reference to
Exhibit 10.1 to the Company's quarterly report on Form 10-Q for the
quarter ended June 30, 1998).
10.9 Amended and Restated Loan Agreement between the Company and Leucadia,
dated as of August 14, 1998 (incorporated by reference to Exhibit 10.2 to
the Company's report on Form 8-K dated August 14, 1998).
10.10 Development Management Agreement between the Company and Provence Hills
Development Company, LLC, dated as of August 14, 1998 (incorporated by
reference to Exhibit 10.3 to the Company's report on Form 8-K dated August
14, 1998).
10.11 Stock Purchase Agreement between the Company and Leucadia, dated as of
August 14, 1998 (incorporated by reference to Exhibit 10.1 to the
Company's report on Form 8-K dated August 14, 1998).
10.12 Amended and Restated Limited Liability Company Agreement of Otay Land
Company, LLC, dated as of October 14, 1998, between the Company and
Leucadia National Corporation (incorporated by reference to Exhibit 10.12
to the Company's report on Form 10-Q for the quarter ended September 30,
1998).
10.13 Stock Purchase Agreement, dated as of October 20, 1998, between the
Company and Leucadia (incorporated by reference to Exhibit 10.1 to the
Company's report on Form 10-Q for the quarter ended September 30, 1998).
10.14 Administrative Services Agreement, dated as of March 1, 1999 between LFC,
the Company HomeFed Resources Corporation and HomeFed Communities, Inc.
21 Subsidiaries of the Company.
27 Financial Data Schedule.
E-2
Exhibit 10.14
ADMINISTRATIVE SERVICES AGREEMENT
---------------------------------
THIS ADMINISTRATIVE SERVICES AGREEMENT ("Agreement") is entered as
of the 1st day of March 1999, between Leucadia Financial Corporation, a Utah
corporation ("Leucadia"), HomeFed Corporation, a Delaware corporation
("HomeFed"), HomeFed Resources Corporation, a California corporation ("HomeFed
Resources"), and HomeFed Communities, Inc., a California corporation ("HomeFed
Communities"), with reference to the following facts:
HomeFed, HomeFed Resources and HomeFed Communities are referred to
herein as the "HomeFed Group." The HomeFed Group desires to retain Leucadia to
provide certain services for the consideration and on the terms and conditions
set forth in this Agreement.
NOW, THEREFORE, the parties hereto agree as follows:
1. Retention of Leucadia. As of the effective date of this
Agreement, Leucadia is retained to provide the services described in this
Agreement in consideration of the payment of the compensation described herein.
2. Scope of Work. Leucadia shall provide the following limited
administrative services required by the HomeFed Group in connection with the
ongoing operation of its businesses, as well as any other services reasonably
related thereto:
(a) Receive, deposit and withdraw certain funds received from
the operations of the HomeFed Group;
(b) Establish and maintain books of account, using accounts
and classifications consistent with generally accepted accounting practices;
(c) Prepare and deliver to the directors of each of the
members of the HomeFed Group a quarterly unaudited statement of income and an
unaudited balance sheet for each member of the HomeFed Group;
(d) Provide, to the extent possible and based upon available
revenues, for the orderly payment of certain accounts payable and insurance
premiums and certain other operating expenses incurred by a member of the
HomeFed Group;
NYFS04...:\30\76830\0194\1901\AGR3229R.460
<PAGE>
(e) Supervise the annual audit of the financial records of
each member of the HomeFed Group; and
(f) Provide certain administrative services and support,
including without limitation, the services of administrative and managerial
personnel.
3. Compensation. As compensation for the services provided under
this Agreement, Leucadia shall be compensated during the term of this Agreement
at an annual rate of $296,101, payable in monthly installments of $24,675 on the
first day of each month. Payments will commence on the first day of the first
month after the date of this Agreement and continue thereafter for the term of
this Agreement. At the expiration of the initial 12- month period commencing on
the date of this Agreement, Leucadia and each member of the HomeFed Group shall
negotiate in good faith to determine the compensation to be paid to Leucadia
under this Agreement for periods subsequent to such initial 12-month period.
4. Term and Termination. The term of this agreement shall commence
on the effective date set forth in the preamble to this Agreement and continue
for a 36-month period thereafter. Prior to the expiration of the term, this
Agreement may be terminated by a written agreement entered into among all of the
parties hereto.
5. Inspection Rights of HomeFed Group. During the term of this
Agreement, each member of the HomeFed Group shall have the right to appoint a
person (other than an employee or officer of Leucadia or any of its affiliates)
who shall have the right to inspect at reasonable times and upon reasonable
notice all books and records maintained by Leucadia pertaining to each member of
the HomeFed Group.
6. Relationship of Parties. The relationship of Leucadia to each
member of the HomeFed Group shall be that of independent contractor and
principal. This Agreement does not create an employer/employee relationship, or
a partnership, joint venture or other agency relationship between the parties.
7. General Provisions.
7.1 Severability. Each provision of this Agreement shall be
viewed as separate and divisible, and in the event any provision shall be held
by a court of competent jurisdiction to be invalid, void, or unenforceable, the
remaining provisions shall continue in full force and effect.
2
<PAGE>
7.2 Waiver. The waiver by any party for a breach or violation
of any provision of this Agreement shall not operate as or be construed to be a
waiver of any subsequent breach.
7.3 Governing Law. This Agreement shall be construed in
accordance with and governed by the laws of the State of Utah.
7.4 Assignment. No party hereto shall have the right to assign
any of its rights, duties or obligations under this Agreement without the prior
written consent of the other parties.
7.5 Notices. All notices and other communications under this
agreement shall be in writing and shall be deemed to have been duly given on the
date of service if personally served on the party to whom notice is to be given,
or 72 hours after mailing, if mailed to the party to whom notice is to be given
by first class mail, postage prepaid and properly addressed to the party at its
address set forth on the signature page of this Agreement or any other address
that such party may designate by written notice to the other parties.
7.6 Successors and Assigns. Subject to the restrictions on
assignment set forth hereinabove, this Agreement shall be binding upon and inure
to the benefit of the legal representatives, successors and assigns of the
parties hereto.
IN WITNESS WHEREOF, this Agreement has been executed as of the date
first hereinabove written.
LEUCADIA FINANCIAL CORPORATION,
a Utah corporation
By:
-----------------------------------
Address: 529 East South Temple
Salt Lake City, UT 84102
3
<PAGE>
HOMEFED CORPORATION,
a Delaware corporation
By:
---------------------------------------
Address: 529 East South Temple
Salt Lake City, UT 84102
HOMEFED RESOURCES CORPORATION,
a California corporation
By:
---------------------------------------
Address: 529 East South Temple
Salt Lake City, UT 84102
HOMEFED COMMUNITIES, INC.,
a California corporation
By:
---------------------------------------
Address: 529 East South Temple
Salt Lake City, UT 84102
4
EXHIBIT 21
Subsidiaries of HomeFed Corporation (the "Registrant")
Percentage of
Outstanding
Place of Stock Held by
Name of Subsidiary Incorporation the Registrant
- ------------------ ------------- --------------
HomeFed Communities, Inc. California 100%
HomeFed Resources Corporation California 100%
NYFS04...:\30\76830\0194\2449\EXH3249V.470
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS INCLUDED IN THE ACCOMPANYING FORM 10-K AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,120
<SECURITIES> 79
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 19,251
<CURRENT-LIABILITIES> 0
<BONDS> 19,736
0
0
<COMMON> 100
<OTHER-SE> (8,097)
<TOTAL-LIABILITY-AND-EQUITY> 19,251
<SALES> 5,752
<TOTAL-REVENUES> 6,064
<CGS> 5,714
<TOTAL-COSTS> 5,714
<OTHER-EXPENSES> 1,330
<LOSS-PROVISION> 425
<INTEREST-EXPENSE> 2,828
<INCOME-PRETAX> (4,233)
<INCOME-TAX> 40
<INCOME-CONTINUING> (4,273)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,273)
<EPS-PRIMARY> (0.43)
<EPS-DILUTED> (0.43)
</TABLE>
