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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 2
[x] AMENDMENT TO ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (Fee Required) For the fiscal year
ended December 31, 1998
Or
[_] AMENDMENT TO TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (No Fee Required) For the transition
period from ___________ to ___________ Commission file number:
1-10153
HOMEFED CORPORATION
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 33-0304982
(State or Other Jurisdiction
of Incorporation or Organization) (I.R.S. Employer Identification No.)
1903 WRIGHT PLACE
SUITE 220
CARLSBAD, CALIFORNIA 92008
(760) 918-8200
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
Securities registered pursuant to Section 12(b) of the Act: NONE.
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [x].
Based on the average bid and asked prices of the Registrant's Common Stock as
published by the OTC Bulletin Board Service as of August 24, 1999, the aggregate
market value of the Registrant's Common Stock held by non-affiliates was
approximately $4,411,500 on that date.
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [X] No [ ]
As of December 31, 1999, there were 10,000,000 outstanding shares of the
Registrant's Common Stock, par value $.01 per share.
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EXPLANATORY NOTE
This Report on Form 10-K/A amends and restates in their
entirety the following Items of the Annual Report on
Form 10-K of HomeFed Corporation, as amended, for the fiscal year ended December
31, 1998.
PART I
Item 1. Business.
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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. Under the terms of the trust agreement, Leucadia Trust is required to
distribute to its beneficial holders all of the Company's Common Stock then
owned by the Leucadia Trust 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.
CURRENT DEVELOPMENT PROJECTS
The Company has been involved in the development of
California real estate since its founding in 1988. 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. While each of
these projects was part of a master planned community, we were not the master
plan developer for either of these projects. Substantially all of the Company's
<PAGE>
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 marketing strategy, by
stopping 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 three clustered housing
development sites and a 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
clustered housing development site 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
the larger Otay Ranch planning area, in which the Company has an equity interest
and for which it is one of several development managers.
For any master-planned community, plans must be prepared
that provide for infrastructure, neighborhoods, commercial and industrial areas,
educational and other institutional or public facilities as well as open space.
Once preliminary plans have been prepared, numerous governmental approvals,
licenses, permits and agreements, referred to as "entitlements," must be
obtained before development and construction may commence. In California,
obtaining the necessary entitlements for large residential developments and
master-planned communities is an extended process, which can involve a number of
different governmental jurisdictions and agencies, considerable risk and
expense, and substantial delays. Unless and until the requisite entitlements are
received and substantial work has been commenced in reliance upon such
entitlements, a developer generally does not have any "vested rights" to develop
a project. In addition, as a precondition to receipt of building-related
permits, master-planned communities such as San Elijo Hills typically are
required in California to pay impact and capacity fees, or to otherwise satisfy
mitigation requirements, based on governmental assessment of the effects of
their projects on the environment, including, among others, impact on
infrastructure, transportation, waste disposal, education and air quality of the
communities.
The land development process for a master-planned community
entails a range of activities, including design engineering, grading raw land,
constructing public infrastructure such as streets,
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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 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.
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 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 field
overhead, management and marketing services it is to provide, based on the
revenues of the project. For additional information, see Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations," of
this Report.
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 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 non-adjoining acres of land located within the larger
22,900-acre Otay Ranch master planned community south of San Diego, California.
Otay Land Company acquired this land for approximately $19,500,000. The Company
contributed $10,125,000 as capital and Leucadia contributed $10,000,000 as a
preferred capital interest; the Company will act as development manager of this
project.
The City of Chula Vista and the County of San Diego have
approved a general development plan for the larger planning area. Although there
is no minimum time within which implementation of the general development plan
must be completed, it is expected that full development of the larger planning
area will take decades. This general development plan establishes land use
goals, objectives and policies within the larger planning area. Any development
within the larger Otay Ranch master planned community must be consistent with
this general development plan. The general development plan for the larger
planning area contemplates home sites, a golf-oriented resort and residential
community, commercial retail centers, a proposed university site and a network
of infrastructure, including roads and highways, a rail transportation system,
park systems and schools.
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Actual development of any of these will require that further entitlements and
approvals be obtained. Because the larger planning area will be developed by
several independent developers, in addition to the Company, an inability to
coordinate with other developers could adversely impact the Company's
development.
Of the 4,800 acres owned by Otay Land Company, 1,200 acres
are developable and 3,600 acres are zoned as various qualities of
non-developable "open space mitigation land." The Company has not yet determined
how it will develop the developable land and, accordingly, it does not yet know
the nature or extent of the entitlements or approvals necessary for its
development. Under the general development plan, approximately 1.2 acres of open
space mitigation land must be set aside for each 1.0 acre of developable land.
Some owners of developable land have adequate or excess mitigation land, while
other owners lack sufficient acreage of mitigation land. The Company expects to
have substantially more mitigation land than it needs to develop its property at
this project. A market for the Company's open space mitigation land exists among
buyers in the San Diego County Region. The Company believes that a market for
this land is likely to develop within the larger Otay Ranch development area as
well.
The Company continues to evaluate how best to maximize the
value of this investment. The Company believes its current cash resources will
be sufficient for property maintenance, management and marketing pending its
determination of how to proceed with this project. Until the Company determines
its objectives, and, if necessary, secures additional entitlements and
coordinates its development activities with other developers, the Company cannot
predict when, or if, any revenues will be derived from this project.
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
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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, 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.
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The Company owns approximately 20 acres at the Paradise
Valley project as described under Item 1 - "Business - Current Development
Projects." Land held for development and sale has an aggregate book value of
approximately $4,636,000 at December 31, 1998.
The Company's corporate headquarters are located at 1903
Wright Place, Suite 220, Carlsbad California 92008 in part of an office building
sub-leased from a subsidiary of Leucadia. The Company's arrangements relating to
this space are described under the heading "Certain Relationships and Related
Transactions."
Item 10. Executive Officers of the Registrant.
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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:
<TABLE>
<CAPTION>
Name Age Position with HomeFed Office Held Since
- ---- --- --------------------- -----------------
<S> <C> <C> <C>
Paul J. Borden 50 President 1998
Corinne A. Maki 42 Secretary and Treasurer 1995
Curt R. Noland 43 Vice President 1998
</TABLE>
The officers serve at the pleasure of the board of
directors of HomeFed.
The recent business experience of our executive officers
and directors is summarized as follows:
Paul J. Borden. Mr. Borden has served as a director and
President of HomeFed since May 1998. Mr. Borden has been a Vice President of
Leucadia since August 1988, responsible for overseeing many of Leucadia's real
estate investments. Mr. Borden has also served as a Vice President of Leucadia
Financial Corporation, a subsidiary of Leucadia.
Corinne A. Maki. Ms. Maki, a certified public accountant,
has served as Treasurer of HomeFed since February 1995 and Secretary since
February 1998. Prior to that, Ms. Maki served as an Assistant Secretary of
HomeFed since August 1995. Ms. Maki has also been a Vice President of Leucadia
Financial, holding the offices of Controller, Assistant Secretary and Treasurer
since October 1992. Ms. Maki has been employed by Leucadia since December 1991.
Curt R. Noland. Mr. Noland has served as Vice President of
HomeFed since October 1998. He spent the last 19 years in the land development
industry in San Diego County as a design consultant, merchant builder and a
master developer. From November 1997 until immediately prior to joining HomeFed,
Mr. Noland was employed by the prior development manager of San Elijo Hills and
served as Director of Development for San Elijo Hills. Prior to November 1997,
Mr. Noland was employed for eight years by Aviara, a 1,000-acre master planned
resort community in Carlsbad, California. He is also a licensed civil engineer
and real estate broker.
PART II
Item 7. Management's Discussion and Analysis of Financial Condition and Results
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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
with Leucadia 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 provide 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. However,
because all of the Company's assets are pledged to LFC to collateralize its
$26,500,000 borrowing from LFC, it may be unable to obtain financing at
favorable rates from sources other than LFC.
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In 1998, the Company entered into agreements to sell
additional common stock to Leucadia in connection with the Development Agreement
and the restructuring of its Convertible Note and related loan agreement with
LFC.
In August 1998, the Company entered into the Development
Agreement with a subsidiary of Leucadia that is the owner and master developer
of the San Elijo Hills project, a master planned community to be sold in phases
to home builders for development of approximately 3,400 homes expected to be
completed over the next ten years. Under the Development Agreement, the Company
is the development manager of the San Elijo Hills project. 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, field overhead and management service fees. These fees are
based on a fixed percentage of gross revenues of the project, less certain
expenses allocated to the project, and are expected to cover the Company's cost
of providing services under the Development Agreement. The Development Agreement
also provides for a success fee to the Company out of the project's net cash
flow, if any, as described below, up to a maximum amount. Whether the success
fee, if it is earned, will be paid to the Company prior to the conclusion of the
project will be at the discretion of the project owner.
To determine "net cash flow" for purposes of calculating
the success fee, all cash expenditures of the project will be deducted from
total revenues of the project. Examples of "expenditures" for these purposes
include land development costs, current period operating costs, and
indebtedness, either collateralized by the project (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"). As a success
fee, the Company is entitled to receive payments out of net cash flow, if any,
up to the aggregate amount of the Indebtedness. The balance of the net cash
flow, if any, will be paid the Company and the project owner in equal amounts.
However, the amount of the success fee cannot be more than 68% of net cash flow
minus the amount of the Indebtedness. There can be no assurance, however, that
the Company will receive any success fee at all for this project. The Company
believes that any success fee that it may receive will be its principal source
of net income earned through 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 that restructured the original Convertible
Note held by LFC, originally issued by the Company in 1995 to fund its
bankruptcy plan and the related loan agreement. The restructured note, dated
August 14, 1998 (the "Restructured Note"):
o has a principal amount of approximately $26,500,000, which
includes additions to principal from accrued and unpaid interest
on the Convertible Note to the date of the restructuring, as
permitted under the terms of the Convertible Note,
o extends the maturity date from July 3, 2003 to December 31, 2004,
o reduces the interest rate from 12% to 6%, and
o eliminates the convertibility feature of the Convertible Note.
The Company pays interest only on the Restructured Note on a quarterly basis.
The principal of the Restructured Note is not due to be repaid until December
31, 2004. During the year ended December 31, 1998, 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. The total purchase price for
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these shares was $8,380,400. During 1998 Leucadia advanced to the Company
$6,710,000 of the total purchase price. This amount is refundable in the event
the closings 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. Under the terms of the trust
agreement, the Leucadia Trust is required to distribute all of the Common Stock
that it owns 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. 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, will beneficially own approximately 12.7%,
and Ian M. Cumming, Chairman of the Board of Directors of Leucadia, will
beneficially own approximately 13.9%, of the 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 $1,100,000. The Company has provided a $1,000,000 letter of
credit for this obligation, which is collateralized by a $1,000,000 deposit. The
Company anticipates construction of the recreation center will begin in 1999.
In February 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.
In connection with an indemnity agreement to a third party
surety, a subsidiary of the Company is required to (1) maintain a minimum net
worth of $5,000,000 and a minimum cash balance of $400,000 or (2) provide an
irrevocable letter of credit. The subsidiary of the Company entered into this
indemnity agreement in 1990 in connection with the construction of
infrastructure improvements in a development located in La Quinta, California.
Based upon current estimates, the amount of the letter of credit required to
satisfy this obligation would be approximately $460,000. The Company has not
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
operating flexibility.
In October 1998, the Company and Leucadia formed Otay Land
Company. The Company invested $10,125,000 as capital and Leucadia invested
$10,000,000 as a preferred capital interest. The Company is the manager of Otay
Land Company. In 1998, Otay Land Company purchased approximately 4,800 acres of
land located south of San Diego, California, for approximately $19,500,000.
Distributions of net income, if any, from this investment first will be paid to
Leucadia until it has received an annual cumulative preferred return of 12% on,
and repayment of, its preferred investment. Any remaining funds will be
distributed to the Company.
In February 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 all of the 97 lots it owned in the Silverwood project to
Southfork Partnership for $3,033,000, less closing costs.
As of December 31, 1998, the Company has net operating loss
carryovers ("NOLs") of $266,245,000 available to reduce its future federal
income tax liabilities and NOLs of $32,305,000
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available to reduce its future state income tax liabilities. Most of these NOLs
are not available to reduce federal alternative minimum taxable income, which is
currently taxed at the rate of 20%. As a result, the Company expects to pay
federal income tax at a rate of 20% during future periods, even if these NOLs
are available to reduce regular taxable income.
RESULTS OF OPERATIONS
Sales of residential properties increased in 1998 as
compared to 1997. In 1998, the Company sold 97 lots in the Silverwood project
and 61 lots at the Paradise Valley project, while in 1997, the Company sold only
82 lots and two finished homes in the Paradise Valley project. Sales of
residential properties decreased in 1997 as compared to 1996 due to the greater
proportion of lot sales in 1997, with only two residential home sales, compared
to the greater proportion of home sales during 1996, when the Company sold 62
lots and 25 homes in the Paradise Valley project and seven homes in another
project.
Land and real estate held for development and sale is
carried at the lower of cost or fair value less costs to sell. The provisions
for losses for the years ended December 31, 1998, 1997 and 1996 reflect the
Company's estimates to reduce the carrying value of real estate investments to
this value. As a result of recording write-downs of carrying values during each
of the last three years, gross profit (loss) upon sale has been insignificant.
Actual cost of sales recorded during these periods reflects the level of sales
activity, as well as provisions for losses.
Interest expense for all years presented primarily reflects
the interest due to LFC on the Restructured Note and Convertible Note, including
interest of $377,000 for 1998, $2,208,000 for 1997 and $2,669,000 for 1996,
which was not paid and was added to the principal balance of the Convertible
Note. Interest expense for 1998 and 1997 also reflects interest of $2,162,000
and $789,000, respectively, due on the Restructured Note and Convertible Note,
which was paid by the Company. Interest of $385,000 was also paid to LFC on a
construction loan in 1996.
The increase in general and administrative expenses in 1998
as compared to 1997 reflects approximately $618,000 of increased costs for
operating expenses attributable to the San Elijo Hills project and Otay Ranch
project, including opening an office in Carlsbad, California.
The decrease in general and administrative expenses in 1997
compared to 1996 reflects reduced professional fees, insurance costs and selling
expenses attributable to the Paradise Valley project, which was substantially
completed in 1996.
Income tax expense for all years presented relates to state
franchise taxes. 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 these tax
benefits.
YEAR 2000
The year 2000 issue is the result of computerized systems
being written to store and process the year portion of dates using two digits
rather than four digits. As a consequence, date-sensitive systems may fail or
produce erroneous results on or before January 1, 2000 because the year 2000
will be interpreted incorrectly.
The Company's software applications generally are purchased
from mass-market software companies and, based on literature provided by
software manufacturers, the Company believes that this software is designed to
be year 2000 compliant. The Company's computer hardware systems are generally
new and designed to be year 2000 compliant. The Company has engaged a consultant
to test its systems to determine their year 2000 compliance. If systems are
found not to be year 2000 compliant, they will be either repaired or replaced.
To date, the Company has incurred costs of less than $5,000 in its year 2000
compliance efforts and does not anticipate making material expenditures in the
future.
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Based upon its year 2000 risk assessment work performed
thus far, the Company believes the most likely year 2000 related failures would
be related to a disruption of materials and services or loss of data or plans
provided by third parties. The Company is assessing all third parties with which
the Company has material relationships to determine their compliance with year
2000 issues. The Company has begun to contact suppliers with respect to their
year 2000 compliance and expects this inquiry to be completed by the fourth
quarter of 1999. Although the Company does not expect that these disruptions
would have a material adverse effect on its financial condition or results of
operations, the Company cannot assure you that its belief is correct or that its
risk assessments are, in fact, accurate. There can be no assurance that the
Company's vendors, suppliers and other parties with whom it does business will
successfully resolve their own year 2000 problems, if any. In the event of any
such failures or other year 2000 failures, there can be no assurance that there
will not be a material adverse effect on the Company's financial condition or
results of operations.
INFLATION
The Company, as well as the real estate development and
homebuilding industry in general, may be adversely affected by inflation,
primarily because of either reduced rates of savings by consumers during periods
of low inflation or higher land and construction costs during periods of high
inflation. Low inflation could adversely affect consumer demand by limiting
growth of savings for down payments, ultimately affecting demand for real estate
and the Company's revenues. In addition, higher mortgage interest rates may
significantly affect the affordability of permanent mortgage financing to
prospective purchasers. High inflation also increases the Company's costs of
labor and materials. The Company would attempt to pass through to its customers
any increases in its costs through increased selling prices. To date, high or
low rates of inflation have not had a material adverse effect on the Company's
results of operations. However, there is no assurance that high or low rates of
inflation will not have a material adverse impact on the Company's future
results of operation.
INTEREST RATES
The Company's operations are interest-rate sensitive.
Overall housing demand is adversely affected by increases in interest costs. If
mortgage interest rates increase significantly, this may negatively impact the
ability of a home buyer to secure adequate financing. This could adversely
affect the Company's revenues, gross margins and profitability.
PART III
Item 11. Executive Compensation
- -------- ----------------------
Set forth below is certain information with respect to the cash
compensation paid by the Company to Patricia A. Wood, its former President and
chief executive officer, who resigned effective May 18, 1998, for services in
all capacities to the Company and its subsidiaries during the years ended 1998,
1997 and 1996. The services of the Company's current President and chief
executive officer, Paul J. Borden, are provided to the Company pursuant to an
Administrative Services Agreement with LFC. As a result, Mr. Borden does not
receive any compensation from the Company. See Item 1. "Business --
Administrative Services; Employees" and Item 13 "Certain Relationships and
Related Transactions" included in this Report. No other officer or employee of
the Company received a total annual salary and bonus in excess of $100,000
during these periods.
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SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
<TABLE>
<CAPTION>
- --------------------------------------- ----------------------- -------------------------- ---------------------------------------
Name and Year Salary Bonus
Principal Position ($) ($)
(a) (b) (c) (d)
- --------------------------------------- ----------------------- -------------------------- ---------------------------------------
<S> <C> <C> <C>
Paul J. Borden, 1998 -- --
President (1)
Patricia A. Wood, 1998 11,500 --
President 1997 26,000 780
1996 24,000 780
- -----------------
(1) Mr. Borden is a Vice President of Leucadia and receives compensation from
Leucadia.
</TABLE>
COMPENSATION OF DIRECTORS
In 1998, Directors who are also employees of the Company or
Leucadia received no remuneration for services as a member of the Board or any
committee of the Board. In 1998, each Director who was not an employee of the
Company or Leucadia was paid $9,000 for attendance at regular meetings of the
Board of Directors. Mr. Considine and Dr. Lobatz also served on a special
committee of directors unaffiliated with Leucadia that was formed to consider
the San Elijo Hills development management agreement. For their services on this
committee, Mr. Considine and Dr. Lobatz each received additional fees of
$20,000.
Item 13. Certain Relationships and Related Transactions.
- -------- -----------------------------------------------
From the time of HomeFed's emergence from Chapter 11
bankruptcy protection in July 1995 through August 25, 1998, Leucadia owned
approximately 41.2% of HomeFed's outstanding Common Stock. Since August 25,
1998, the Leucadia Trust has owned this 41.2% interest. Under the terms of the
Leucadia Trust trust agreement, Joseph S. Steinberg, a director of HomeFed, as
well as a director and President of Leucadia and Ian M. Cumming, Chairman of the
Board of Leucadia, jointly have the right to vote any shares of HomeFed Common
Stock held by the Leucadia Trust.
Set forth below is information concerning agreements or
relationships between HomeFed and Leucadia and its subsidiaries.
In March 1998, the Board of Directors of HomeFed formed a
special committee of directors unaffiliated with Leucadia to consider a proposal
from Leucadia that HomeFed enter into an agreement to become development manager
of San Elijo Hills. This committee, consisting of Mr. Considine and Dr. Lobatz,
engaged consultants to evaluate the development proposal, performed substantial
due diligence with respect to the proposal, negotiated the structure of the
development proposal with Leucadia (which included Leucadia's agreement to make
equity financing available to HomeFed and to restructure the terms of HomeFed's
outstanding $20 million convertible collateralized note issued to LFC (described
below)) and recommended that the Board of Directors approve the development
management agreement.
In August 1998, upon approval of the Board of Directors,
with Mr. Borden, a Leucadia Vice President, not voting, HomeFed entered into a
development management agreement with a subsidiary of Leucadia. Pursuant to the
development agreement, HomeFed is the 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, HomeFed is
responsible for the overall management of the project, including arranging
financing, coordinating marketing and sales activity, and acting as
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construction manager. The development agreement provides that HomeFed will
receive certain fees in connection with the project. These fees consist of
marketing and management service fees, which are based on a fixed percentage of
gross revenues received by the project. The marketing and management service
fees are expected to cover HomeFed's cost of providing these services. In
addition, the development agreement provides for payment of a success fee under
certain circumstances to HomeFed based on the net cash flow from the project (as
determined in 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. Through April 26, 1999, no
amounts are payable to HomeFed under the development agreement.
The Company's Chapter 11 plan of reorganization was
principally funded by the issuance of a $20,000,000 convertible note to LFC. As
of August 14, 1998, in connection with the development agreement, HomeFed and
LFC entered into an Amended and Restated Loan Agreement pursuant to which the
original convertible note and the related loan agreement were restructured. The
restructured note, dated August 14, 1998, is in the principal amount of
approximately $26,462,000 (including additions to principal resulting from
accrued and unpaid interest on the original note to the date of the
restructuring, as allowed under the terms of the original note), extends the
maturity date from July 3, 2003 to December 31, 2004, reduces the interest rate
from 12% to 6% and eliminates the convertibility feature of the original note.
Interest only on the restructured note is paid quarterly and all unpaid
principal is due on the date of maturity. During the year ended December 31,
1998, HomeFed paid approximately $2,162,000 in interest on the original note and
the restructured note. Through April 26, 1999, interest of $391,000 was paid on
the restructured note.
In August and October 1998, HomeFed entered into two stock
purchase agreements with Leucadia, pursuant to which HomeFed 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 these stock purchase
agreements, Leucadia advanced to HomeFed $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 issued and
outstanding HomeFed Common Stock. Under the terms of the trust agreement,
Leucadia Trust is required to distribute to its beneficial holders all of the
HomeFed Common Stock owned by the Leucadia Trust as promptly as practicable
following the closing of stock purchases under these stock purchase agreements
and the effectiveness of a registration statement filed with the Securities and
Exchange Commission. After giving effect to the stock purchases by the Leucadia
Trust, the 5,882,014 shares held by HomeFed's current stockholders (excluding
the Leucadia Trust) will represent, in the aggregate, approximately 10.4% of the
stock to be outstanding. After the distribution of stock by the Leucadia Trust,
Joseph S. Steinberg will own 12.7%, and Ian M. Cumming, will own approximately
13.9%, of the outstanding HomeFed Common Stock.
As of October 14, 1998, HomeFed and Leucadia formed Otay
Land Company, LLC. HomeFed invested $10,125,000 as capital and Leucadia invested
$10,000,000 as a preferred capital interest. HomeFed is the manager of Otay Land
Company. In 1998, Otay Land Company purchased approximately 4,800 acres of land
that is part of a 22,900 acre project located south of San Diego, California,
known as Otay Ranch for approximately $19,500,000. Distributions of net income,
if any, from this investment first will be paid to Leucadia until it has
received an annual cumulative preferred return of 12% on, and repayment of, its
preferred investment. Any remaining funds are to be distributed to HomeFed.
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<PAGE>
Certain of HomeFed's administrative services and managerial
support are provided to HomeFed by LFC pursuant to an administrative services
agreement. Pursuant to this agreement, LFC provides the services of Paul J.
Borden, HomeFed's President, and Corinne A. Maki, HomeFed's Treasurer and
Secretary. Mr. Borden and Ms. Maki each are officers of LFC and Leucadia. Mr.
Borden and Ms. Maki do not receive compensation for serving as officers of
HomeFed. 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, 2000. A portion of this fee is allocable to
Leucadia's cost of providing the services of Mr. Borden. No specific allocation
has been made for providing the services of Ms. Maki. 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 HomeFed and
LFC. Administrative fees paid to LFC since January 1998 aggregated $212,000, of
which $140,000 is attributable to Leucadia's cost of providing Mr. Borden's
services.
On February 27, 1998, HomeFed purchased 19 lots at the
Silverwood project from LFC for a purchase price of $500,000. On July 31, 1998,
HomeFed sold its entire 97 lot interest in the Silverwood project to Southfork
Partnership for $3,033,000, less closing costs.
HomeFed rents office space and furnishings from a
subsidiary of Leucadia for a monthly amount equal to its share of the Leucadia
subsidiary's cost for such space and furnishings (based upon occupancy of the
facility). The agreement pursuant to which the space and furnishings are
provided extends for a 6-year period (coterminous with the Leucadia subsidiary's
occupancy of the space) and provides for a monthly rental of $15,400. Since
January 1, 1998, HomeFed has accrued $55,981 in rental to the Leucadia
subsidiary, of which $18,900 was paid through March 31, 1999.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this amendment to be signed on its behalf by the
undersigned thereunto duly authorized.
HOMEFED CORPORATION
Registrant
By: /s/ Corinne A. Maki
--------------------------
Corinne A. Maki, Treasurer
Dated: August 27, 1999
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